HE 

-Railroad   finanei-e. 

^dfc^uw^" 

T^Wo^.  A^-J^MJ^^ 

T^                            1       V./,^       ...*^ii 

This  book  is  DUE  on  the  last 
date  stamped  below 


mn 


>m  2  6  1929 
UL  3  0  1929 

2 


^•93i) 


MAR  2  7  1933 


^ 


frW?fl 


UNIVERSITY  of  CAT  TT^r)T?:jr4 

A'i 

LOS  ANGELES 

LIBRARY 


J  AN  131949 
MAY  5      J960 


RAILROAD    FINANCE 


AILRO 
F  I  N  A  N  C 


BY 

FREDERICK  A.  CLEVELAND,  Ph.D.,  LL.D 

AND 

FRED  WTLBUR  POWELL,  A.M. 


D.  APPLETON   AND    COMPANY 
NEW  YORK  AND  LONDON 

1923 


COPTRIGHT,    1912,  Bt 

D.  APPLETON  AND  COMPANY 


Printed  in  the  United  States  of  America 


"--l    ) 


PREFACE 

The  purpose  of  this  volume  is  to  describe  the  methods 
of    financing    Railroads    in    the    United    States,     A    pre- 
liminary draft  was  used  as  a  series  of  lectures  before  the 
Wharton  School  of  the  University  of  Pennsylvania  in  1901 
K      and  1902.     Later,  in  collaborating  with  Mr.   Powell,  the 
f^      historic  sivie  of  "Railway  Promotion  and  Capitalization  in 
"^      the  United  States"  was  v.-orked  out  for  the  Carnegie  In- 
^\^    stitution   and   published  by   Messrs.   Longmans,   Green  & 
Company.     During    the    years    which    have    followed,    as 
time    could   be    found,    this    collaboration    has    continued. 
Since  the  first  two  chapters  of  this  volume  traverse  the 
same  subject  as  the  volume  above  referred  to,  use  is  made 
^J,i     of  some  of  the  same  materials. 

r\  Frederick  A.  Cleveland. 

Washington,  D.  C. 


1 


CONTENTS 

CHAPTEB  PAGE 

I. — The  Economic  Basis  of  Raileoad  Investment  .  .  1 
Capital  devoted  to  transportation  enterprise — The 
economic  advantage  to  be  capitalized — Tlie  induce- 
ment to  investment — Saving  made  possible  by  better 
roads — Advantage  of  turnpike  construction — How 
profits  were  divided — Investment  basis  of  tlie  canal 
— Capitalization  of  its  advantage  over  the  turnpike 
in  the  long  haul — A  view  from  the  interior — Eco- 
nomic advantages  of  the  railroad  over  the  canal — 
The  railroad's  supremacy  over  the  canal — Its  ad- 
vantage as  a  long-distance  carrier. 

II.     Promotion  and  Undebwriting 14 

Promotion  and  exploitation — Surveys — Location  and 
operating  efficiency — Incorporation — Monopoly  privi- 
leges— Banking  privileges — Tax  exemptions — Local 
subsidy  enabling  acts — Methods  of  appeal  for  finan- 
cial support — The  prospectus — Public  meetings — The 
press  and  the  pulpit — House  to  house  canvass — The 
financial  agent — The  banker  as  a  financial  agent — 
Appeal  to  the  creditor  class  of  investors — Under- 
writing and  holding  syndicates — The  "financial" 
banker — Conditions  precedent  to  accepting  risk — 
Profits  of  financing — What  is  underwriting? — The 
underwriting  syndicate — The  holding  syndicate — 
Individual  withdrawals — Sales  of  underwritten  se- 
curities— Possibilities  of  loss — Influence  of  the  great 
houses — Conspicuous  independent  operations — The 
nature  of  the  financial  support — In  general — Indi- 
vidual subsidies — Local  subsidies — State  subsidies 
— National  subsidies — Land  grants — Loans  of  credit. 

III. — Capitalization  ;  Original  and  Supplementary.  .  34 
Need  for  exact  definition  of  "capital" — Confusion 
of  ideas — A  definition  submitted — Capital  as  an  in- 
strument of  a  going  concern — Classification  and 
valuation  of  capital  assets — Classification  of  capital 
vii 


CONTENTS 

CHAPTER  PAGE 

liabilities — Practical  considerations  in  original  cap- 
italization— The  corporation's  interest  in  the  choice 
of  capital  issues — Advantage  of  issue  of  shares — 
Preferred  rights  and  privileges  to  shareholders — 
Obligations  to  creditors — Long  and  short  term  credit 
obligations — Contracts  with  lessors — Appropriations 
out  of  surplus  for  capital  use — The  marliet  for 
original  shares — The  market  for  bonds — Forms  in 
which  capital  may  be  obtained — Inadequacy  of  in- 
itial capitalization  of  American  railroads — Issue  of 
additional  securities — Privileged  subscriptions — 
Short  term  notes. 

IV.     Finances  of  Construction 50 

Definition — Construction  financed  through  sales  of 
shares — Supplementary  bond  issues — Exchange  of 
shares  for  land,  labor,  and  materials — Share  capital 
for  roadbed ;  bonds  for  rails  and  equipment — Subsi- 
dies as  collateral  aids  to  capitalization — Bonds 
favored  by  investors — Secured  on  tributary  territory 
rather  than  on  railroad  property — Bonds  sold  at 
discount ;  shares  given  as  bonus — Land  bonds — Net 
earnings  applied  to  construction — Agencies  of  con- 
struction— Construction  directly  by  the  railroad — 
Early  railroads  built  by  small  contractors — Large 
contractors  and  construction  companies — Contract 
work  paid  for  in  securities — The  dependent  or 
"inside"  construction  company — Large  profits  of  pro- 
moters— Fraudulent  contracts — Use  of  privileged  in- 
formation for  personal  profit — Speculative  land 
companies — Types  of  construction  company  con- 
tracts— Texas  and  Pacific — Wisconsin  Central — The 
Credit  Mobilier — Building  of  the  Union  Pacific — Du- 
rant — His  quarrel  with  Ames — The  compromise — 
Evasion  of  the  law — Fear  of  congressional  action — 
Shares  sold  to  members  of  congress — Attitude  of 
Ames — Construction  of  the  California  lines — The 
Contract  and  Finance  company — The  Pacific  Im- 
provement company — System  responsible  for  in- 
ferior work  and  overconstruction — Construction  of 
extensions — Railroads  usually  built  in  sections — 
viii 


CONTENTS 

CHAPTER  PAGE 

Separate  corporations — Endorsement  of  bonds  by 
parent  company — Share  subscriptions — Collateral 
trust  bonds — Modern  construction  methods  illus- 
trated— The  Western  Pacific — The  St.  Paul  exten- 
sion— Construction  of  special  structures — Bridges 
— Bridge  bonds — Bridge  company  bonds — Joint  in- 
terest in  bridge  construction — Terminals — Terminal 
bonds — Terminal  company  bonds — Joint  ownership 
of  terminal  property. 

V. — Financing   Equipment 81 

Definition — Cash  purchase — Manufacture  in  railroad 
shops — Purchase  with  proceeds  of  bonds — Purchase 
on  the  installment  plan — Directly  from  manufac- 
turer— Through  a  trustee — The  equipment  or  car 
trust — Adequate  security  of  car  trust  certificates — 
Forms  of  car  trust  agreements — Subsidiary  equip- 
ment companies — Equipment  company  bonds — 
Rental  contracts — Rolling  stock  companies — Private 
car  lines — Provision  for  repairs  and  renewals — Re- 
placement of  equipment — Provision  for  obsolescence 
— Abuses  of  repairs  and  renewals  account — Re- 
quirements of  interstate  commerce  commission — 
Reserve  account  for  each  class  of  equipment — The 
theory  behind  the  new  requirement. 

VI. — Organization  for  Financial  Management  ...  95 
Corporate  powers  of  management — Financial — 
Management — Financial  organization — The  treas- 
urer— Transfer  agent  and  registrar — Fiscal  agent — 
Transfer  and  registration  of  securities — Organiza- 
tions for  protection  of  investors — Dutch  bureaus  of 
administration — Association  of  American  Bond  and 
Shareholders — Investment  trusts — The  voting  trust — 
Independent  auditors — Public  accountants — Protec- 
tion of  the  corporation  from  its  financial  officers — 
Prevention  of  fraudulent  issue  of  securities — The 
Schuyler  frauds. 

VII. — Protection  of  the  Corporate  Estate  as  a  Function 

OF  Management 107 

The  protection  of  capital — The  law  of  property — 
ix 


CONTENTS 

CHAFTEB  PAGE 

luheritance  and  remainder  interests — The  law  of 
waste — The  law  of  uses — The  law  of  agency  and 
trusteeship — Corporation  law — Provisions  for  pro- 
tection of  corporate  capital — Prerequisites  for  en- 
forcing the  law — Information  necessary  to  protec- 
tion of  the  corporate  estate — Officers  required  to 
keep  full  and  true  accounts — Early  forms  of  capital 
accounts — More  recent  requirements  for  statement 
of  capital — Defective  in  form  but  adequate  in  ef- 
fect— Provisions  for  independent  verification  of 
statements — Verification  of  capital  account — Protec- 
tion of  shareholder  and  creditor  the  central  thought 
— Statutory  provisions  for  preservation  of  evidence 
necessary  to  enforce  official  responsibility — Laws 
making  falsification  or  destruction  of  records  a  mis- 
demeanor— Laws  making  false  statements  a  misde- 
meanor— The  double  balance  sheet  as  an  instrument 
for  protection  of  capital — British  law  makes  such 
statement  possible — American  practice  in  violation  of 
principles  of  law — Exact  information  a  primary  ne- 
cessity— Interstate  commerce  commission  balance 
sheet — Summary  consolidated  balance  sheet — Sug- 
gested arrangement  in  double  balance  sheet  form 
of  accounts  prescribed  by  interstate  commerce 
commission — Suggested   form   for   current   account. 

VIII. — Financial    Considerations    in    Maintenance    and 

Additions   and   Betterments 129 

Problems  of  management — Elements  of  mainte- 
nance— Repairs  and  replacements — Depreciation — 
Maintenance  of  subsidiary  properties — Maintenance 
of  capitalized  funds — Working  capital  funds — Con- 
struction and  equipment  funds — Funds  for  additions 
and  betterments — Sinking  funds — Employees'  insur- 
ance, pension,  and  provident  funds — Property  insur- 
ance funds — Additions  and  betterments — Definition 
— Reduction  of  operating  expenses — Notable  changes 
effected  by  Harriman — The  capitalization  of  im- 
provements —  English  practice  —  American  prac- 
tice— Need  for  additional  protection  to  invest- 
ors— Surcharged  maintenance  accounts — Tendency 
X 


CONTENTS 

CHAPTEB  PAGE 

to  abuse — Reserve  account  for  extraordinary  ex- 
penditures— Direct  charges  against  surplus — The 
new  official  classification  of  accounts — Provision 
against  understatement  of  operating  expenses. 

IX. — Some  Financiax,  Aspects  of  Operation  ....  149 
Operation  concerned  with  net  earnings — Earnings 
and  the  rate  of  transportation — Tendency  to  limit 
earnings — The  problem  of  management — Earnings 
and  volume  of  traffic — Encouragement  of  settlement 
and  of  local  industries — Encouragement  of  through 
traffic — Expenses  and  efficiency  of  management — In- 
terest of  the  public  as  represented  by  government — 
Uninterrupted  service — Adequacy  of  service — Pro- 
visions for  health,  comfort,  and  convenience — 
Safety — Interest  of  railroad  employees — Interest  of 
supply  dealers — Tendency  to  Increase  expenses — 
Opportunity  for  economical  management — Contract- 
ing and  purchasing — Labor  cost  and  labor  efficiency 
— Efforts  to  promote  labor  efficiency — Economical 
purchase  of  materials  and  supplies — Economical  use 
of  materials  and  supplies — Economical  use  of  rail- 
road property  and  equipment — "Scientific  manage- 
ment" as  a  factor  in  economical  operation — Ob- 
.stacles  in  the  way — Managerial  responsibility  of  the 
directorate — Company  work  vs.  contract  work. 
X. — Management  and  Distribution  of  the  Surplus  .  166 
Control  vested  in  the  directors — Scope  of  authority — 
Uses  made  of  the  surplus — Protection  of  the  cor- 
porate estate — Improvement  of  the  personnel — In- 
crease of  business — Reduction  of  the  funded  debt — 
Equalizing  dividends — Distribution  of  invested 
surplus — Dividends  representing  subscribed  surplus. 

XI. — Accounts   and    Statistics 178 

Development  of  the  accounting  department — Inade- 
quacy of  accounts  of  early  railroads — Lack  of  ad- 
ministrative control — Progress  toward  uniformity 
— Effect  of  publicity  requirements  of  state  and  na- 
tional laws — Uniformity  attained  under  Hepburn  act 
— Organization  of  accounting  department — Chief  ac- 
counting officer — General  accounts — Supervision  of 
xi 


CONTENTS 

CHAPTEB  PAGE 

treasurer's  accounts — Traveling  auditors — Freight 
auditor — Tlie  waybill — local  and  through — Inter- 
line— The  waybill  en  route — Collections — Agents' 
abstracts  of  waybills  forwarded  and  received — In- 
terline balances — Auditor  of  passenger  receipts — 
Tickets — Cancellations  and  cash  collections — Re- 
ports of  agents  and  conductors — Interline  ticket  re- 
ports— Auditor  of  disbursements — Payrolls — Requi- 
sitions for  materials  and  supplies — Vouchers — Dis- 
tribution of  expense — Classification  of  operating  ex- 
penses— Interline  balances — Joint  facilities  ac- 
counts— Claims — Classification  of  operating  reve- 
nues— Operating  account — Income  account — Profit 
and  loss  account — The  general  balance  sheet — Sta- 
tistical functions  of  the  accounting  department — 
Importance  of  operative  statistics — Units  of  meas- 
urement— Distribution  of  expense — Direct  and  in- 
direct— Freight  and  passenger — Allocation  of 
common  expenses — The  operating  ratio — Freight 
statistics — Commodity  units — Passenger  statistics — 
Reports — Provisions  of  the  Hepburn  act — Inade- 
quacy of  early  reports — Essentials  of  an  adequate 
report. 

XII. — Causes   of   Insolvency 215 

Insolvency  distinguished  from  bankruptcy — Insol- 
vency distinguished  from  deficit — Credit  considered 
as  a  "short  sale" — Rights  of  shareholders  and  of 
bondholders — Fixed  charges — Burdensome  leases — 
Vermont  Central  lease — Heavy  fixed  charges — Ex- 
cessive mileage — Faulty  construction  and  low 
credit — Unproductive  branch  lines — Dishonest  prac- 
tices— Inadequate  reports — Competition  of  rates  and 
of  service — Hostile  legislation — Floating  debt  the 
immediate  cause  of  insolvency — Insufficient  working 
capital — Effect  of  general  business  conditions  on 
railroad  earnings — Inadequacy  of  early  reorganiza- 
tions. 

XIII. — Receivebship 227 

The  receiver — Bondholders'  right  to  possession  and 
sale — Trustee   as    representative   of   bondholders — 
xii 


CONTENTS 

CHAPTER  PAGK 

Obstacles  in  the  way  of  trustees — Public  lien — Pub- 
lic policy  against  segregation  of  properties — Limita- 
tions of  trustee  as  to  management  and  sale — Com- 
plexity of  interests  in  the  property — Earning  power 
the  real  security — Position  of  shareholders — The 
public  interest — Receivership  a  necessary  expedient 
— Conflicting  interests — Solvent  receivership — Appli- 
cation for  a  receiver — "Friendly"  receivership — 
Secret  application — Application  by  public  officials 
proposed — Qualifications  for  receiver — The  court  the 
judge  as  to  fitness — Jurisdiction  of  receivers — The 
Northern  Pacific  controversy — Financial  and  admin- 
istrative aspects  of  receivership — Repairs  and  bet- 
terments— Construction — Interest  payments — Pay- 
ment of  back  claims — Reduction  in  wages — Methods 
of  raising  money — Receivers'  certificates — Excessive 
issues — Termination  of  receivership — Surrender  of 
property — Foreclosure — Reorganization. 

XIV. — Reobganization 248 

Why  reorganization  is  necessary — Special  reasons 
for  readjustment  without  foreclosure — The  principle 
underlying  a  mortgage — "Strict"  foreclosure  rare — 
Administrative  purpose  of  reorganization — Financial 
purpose  of  reorganization — Reorganization  commit- 
tees— Bankers  as  disinterested  parties — Deposit  of 
securities — Rights  of  dissentient  parties — Advantage 
of  bondholders  at  foreclosure  sale — Sacrifices  of 
shareholders — Assessments — New  securities  to  rep- 
resent assessment — Partial  loss  of  proprietorship — 
Assessment  of  junior  bondholders — Conversion  of 
bonds  into  shares — The  margin  of  safety — Reduction 
of  lien  of  bonds — Mortgage  bonds  replaced  by  in- 
come bonds — By  preferred  shares — Reduction  of 
rate  of  interest — Underlying  bonds  not  disturbed 
— Status  of  the  reorganized  corporation — Free  from 
old  contracts — Provision  for  future  of  new  corpo- 
ration— Reserves  for  betterments — Provisions  for  re- 
tirement of  maturing  bonds — Function  of  the  under- 
writing syndicate — The  rating  trust — Insures  control 
of  the  new  corporation — Results  of  reorganizations 
xiii 


CONTENTS 

CHAPTER  PAGE 

— Reduction  of  fixed  charges — Increase  of  aggregate 
capital. 

XV. — Consolidation ,     272 

Conveyances,  leases,  and  share  control — Union  of 
connecting  lines — Some  early  consolidations — Popu- 
lar opposition — Period  of  trunk  line  develop- 
ment— Through  lines  from  Chicago  and  St.  Louis 
to  the  seaboard — Effect  of  Sherman  anti-trust  act — 
Community  of  interest — Vanderbilt — Pennsylvania — 
Union  Pacific — The  seven  great  financial  interests — 
Regimal  grouping — Huntingdon's  plan  for  a  single 
company — Progress  of  consolidation  in  New  Eng- 
land— Similar  tendency  throughout  the  country — 
Motives  of  consolidation — Efficiency  of  operation — 
Strategic  position — Terminals — Restraint  and  elim- 
ination of  competition — Speculative  gains — Forms  of 
consolidation — Direct  union — Merger — Conveyance — 
Foreclosure — Share  ownership — For  income — For 
control — Acquisition  of  shares — Collateral  trust 
notes  as  aids  to  consolidation — Minority  or  "work- 
ing" control — Individual  holding  of  balance  of 
power — Minority  control  and  stock  market  "raids" 
— Tendency  toward  absolute  ownership — Simplifica- 
tion of  organization — The  lease  as  a  means  of  con- 
solidation— Terms — Long  term  leases  as  preliminary 
mergers — Rentals. 

XVr. — Consolidation   (Continued) 303 

Railroad  trust  proposed — Holding  companies — 
Pennsylvania — Southern  Pacific — Wisconsin  Cen- 
tral— Great  Northern — Southern  Railway  Security 
■ — Richmond  Terminal — Georgia — Oregon  and  Trans- 
continental— Reading — Railroad  Securities — North- 
ern Securities — The  federal  suit — Rock  Island— 
"Queen  and  Cresent"  group — Richmond — Washing- 
ton— Railroads  as  holding  companies — Lake  Shore — 
Missouri  Pacific — New  Haven — Boston  Railroad 
Holding  company — Single  railroad  holding  com- 
pany proposed — Results — Operation — Rates — Secu- 
rity values — Public  interest. 

xiv 


CONTENTS 

CHAPTEE  PAGE 

XVII. — Overcapitalization 322 

Fuudamental  concepts  relating  to  capital — As  re- 
lated to  the  corporation — As  related  to  investors — 
As  related  to  the  public — Determination  of  the 
amount  of  capitalization — Lack  of  evidence  in  ac- 
counts— Standards  of  appraisement — Amount  of  lia- 
bilities— Original  cost  less  depreciation — Impossible 
of  determination — No  relation  to  present  value — Cost 
of  reproduction — Official  appraisals — Distinction 
between  valuations  for  taxation,  rate-making,  and 
capitalization  —  Non-physical  values  —  Realization 
value — Occasions  of  inflation — Construction — Reor- 
ganization —  Consolidation  —  Share  dividends  —  Re- 
sults— Tends  toward  high  rates  on  non-competitive 
traffic — Inadequate  facilities — Opportunity  for  fraud- 
ulent practice — The  interest  of  the  investor — Un- 
necessary mileage — Inconsistency  of  public  attitude 
— Prejudice  against  high  dividend  rates — State  regu- 
lation of  issuance  of  securities — Massachusetts — 
Texas — New  York — Other  states — Regulation  by 
interstate  commerce  commission — The  argument  in 
favor  of  federal  regulation — Railroad  securities  com- 
mission— Full  publicity  recommended. 

XVIII.— Bibliography 353 

Bibliographical  aids — Periodicals — Histories — Re- 
ports of  foreign  observers — Promotion — Construction 
— Equipment — Additions  and  betterments — Manage- 
ment —  Accounts  —  Statistics  —  Reports  —  Re- 
ceivership —  Reorganization  —  Consolidation  — 
Overcapitalization — Alphabetical  list  of  sources  and 
materials. 


XV 


CHAPTER  I 
THE  ECONOMIC  BASIS  OF  RAILROAD  INVESTMENT 

Capital  Devoted  to  Transportation  Enterprise. — A 
hundred  years  ago  the  only  railroad  known  was  the  tram- 
way. Twenty-five  years  later  the  steam  locomotive  ex- 
isted as  an  object  of  speculative  interest,  but  it  had  no 
place  in  the  W'Orld's  industrial  system.  The  second  quar- 
ter of  the  nineteenth  century  was  given  over  to  experi- 
ments, and  to  the  development  of  the  practical  side  of  con- 
struction and  management;  yet  during  this  brief  experi- 
mental period  about  eighteen  thousand  miles  of  railroad 
were  built,  and  over  $1,500,000,000  of  capital  expended. 
More  than  nine  thousand  miles  of  this  development  took 
place  within  the  United  States,  a  new  country,  with  little 
capital  available.  It  is  at  first  a  matter  of  surprise  that 
so  much  capital  should  have  been  devoted  to  a  new  un- 
dertaking, and  more  especially  that  a  large  proportion  of 
the  expenditure  should  have  been  in  a  country  slightly  de- 
veloped and  little  known. 

Some  writers  have  regarded  this  as  a  period  given  over 
to  reckless  adventure,  which  brought  with  it  wholesale  de- 
struction of  capital  and  national  disaster.  But  whatever 
the  disturbances  of  credit  due  to  railroad  promotion,  the 
fact  remains  that  it  was  a  time  of  great  material  progress, 
and  that  few  of  these  early  railroads  were  unsuccessful 
from  the  viewpoint  of  national  wealth.  In  England  such 
enterprises  as  the  Liverpool  and  Manchester,  and  the  Lon- 
don and  Southampton  were  got  under  way.  In  America 
the  Western,  the  Boston  and  Providence,  the  Old  Colony, 
and  the  Boston  and  Lowell  of  Massachusetts;  the  Hartford 
and  New  Haven  of  Connecticut;  the  Philadelphia  and  Co- 
3  1 


RAILROAD  FINANCE 

lumbia  and  the  Philadelphia  and  Trenton  of  Pennsylvania ; 
the  Camden  and  Amboy  of  New  Jersey ;  the  Baltimore  and 
Ohio  and  the  Baltimore  and  Susquehanna  of  Maryland 
were  a  few  among  the  many  successful  projects  launched 
before  1850.  Taking  the  entire  list  of  roads  built  during 
this  early  period,  it  would  be  difficult  to  find  even  a  local 
tramline  which  has  not  become  a  permanent  part  of  some 
splendid  system  of  transportation. 

In  England,  Germany,  France,  Belgium,  and  in  the 
United  States  these  early  railroads  were,  and  are  to-day, 
among  the  most  valuable  and  productive  properties  in  the 
whole  economic  system.  Furthermore,  not  a  few  of  these 
early  roads  were  regarded  as  conservative  investments,  and 
subsequent  experience  has  approved  the  judgment  of  the 
men  of  that  day  who  had  sufficient  capital  fully  to  equip 
the  enterprises.  "Within  a  century  it  is  probable  that  the 
people  of  the  United  States  had  invested  no  less  than  twelve 
billion  dollars  in  the  improvement  of  country  roads  and 
turnpikes,  one  billion  dollars  in  river  and  harbor  and  canal 
improvement,  state  and  national,  and  twelve  billion  dollars 
in  the  construction  and  equipment  of  tramlines  and  rail- 
roads; not  less  than  twenty-five  billion  dollars  of  capital 
found  employment  in  inland  transportation  enterprise. 
.  The  Economic  Basis  of  the  Railroad. — The  principle 
underlying  investment  is  certainty  of  return.  Before  the 
investor  will  be  attracted  to  an  old  and  well  established 
enterprise,  there  must  be  assurance  of  income  on  cap- 
ital expenditure.  To  attract  him  to  new  and  untried 
fields,  there  must  be  assurance  of  increased  profits 
— ^something  above  the  current  rate.  Something  in  the 
nature  of  a  "bonus"  must  be  held  out  to  cause  thoughtful 
men  to  turn  away  from  old  and  well-known  lines  of  invest- 
ment. What  was  there  to  give  this  assurance?  What 
was  the  situation  which  offered  profits  in  transportation 
development  ? 

2 


ECONOMIC  BASIS  OF  RAILROAD  INVESTMENT 

The  Inducement  to  Investment. — A  vast  wilderness 
with  only  a  fringe  of  civilization,  a  continent  almost  unex- 
plored, was  the  America  of  1790.  The  frontiersman  was 
still  to  be  found  in  the  small  clearings  of  Maine,  New 
Hampshire,  and  Vermont.  Fully  two-thirds  of  New  York 
and  Pennsylvania  were  yet  unclaimed — a  common  hunting 
ground.  In  this  situation  was  found  the  extraordinary  in- 
ducement, the  "bonus"  held  out  to  investors  in  any 
schemes  of  transportation  which  would  make  the  inland 
resources  available.  Here  were  whole  empires  of  valuable 
timber  and  agricultural  lands,  rich  deposits  of  iron,  coal, 
and  other  minerals — all  materials  of  national  wealth — 
waiting,  a  prize  to  him  who  might  claim  them  as  a  reward 
for  enterprise.  The  cost  of  transportation  equipment  has 
been  enormous;  yet  the  inducement  has  been  at  all  times 
sufficient  to  attract  the  investor. 

Saving  Made  Possible  hy  Better  Roads. — The  financial 
inducement  to  transportation  improvement  was  of  two 
kinds:  the  saving  which  it  would  make  within  the  terri- 
tory already  developed;  and  the  interior  resources  which 
might  be  reclaimed  beyond  the  reach  of  the  system  sup- 
planted.^ By  way  of  illustration  of  the  relative  advan- 
tages of  the  various  kinds  of  road  equipment,  let  us  take  a 
town  as  a  center.  Assuming  all  the  land  round  about 
equally  adapted  to  yielding  a  crop  of  oats,  which  might  be 
marketed  at  ten  dollars  an  acre  on  delivery  at  this  trade 
center:  Over  an  ordinary  horse  path  or  trail  a  horse  may 
carry  about  two  hundred  pounds;  on  a  cart,  over  a  good 
dirt  road,  the  same  horse  may  draw  one  thousand  pounds ; 
on  a  turnpike  of  macadam  bed,  about  two  thousand 
pounds.  From  this  statement  of  the  ease,  the  relative  ad- 
vantage to  the  producer  of  the  better  road  is  apparent.  If 
a  pack  horse  could  move  the  product  of  two  acres  a  mile  a 

1  See  "Are  We  Building  Too  Many  Railroads?"  Amer.  Railroad 
Jour.,  XXV,  305-6,  395-7,  410-11.     (1852.) 

3 


RAILROAD  FINANCE 

day  at  a  cost  of  two  dollars,  then  the  net  return  would  be 
nine  dollars  from  each  acre  one  mile  from  the  trade  center, 
eight  dollars  from  each  acre  two  miles  distant,  etc.,  until 
the  ten-mile  limit  had  been  reached,  when  the  cost  of  trans- 
portation would  consume  the  entire  selling  price  of  the 
product,  and  render  production  an  economic  impossibility. 
In  fact,  cultivation  would  stop  before  this  point  was 
reached,  owing  to  the  cost  of  marketing  the  crop.  Under  ex- 
actly the  same  conditions  of  production,  above  assumed,  it 
would  cost  only  one-fifth  as  much  to  get  to  market  over  a 
dirt  road.  The  result  would  be  that  over  one  million  dol- 
lars annually  would  be  saved  to  this  small  community  in 
decreased  cost  of  transportation  within  a  radius  of  ten  miles. 
The  capital  cost  of  the  necessary  equipment  would  not  be 
more  than  six  hundred  thousand  dollars.  Assuming  that 
the  land  were  all  improved  and  awaiting  better  roads, 
about  one  hundred  and  seventy  per  cent,  would  be  the  an- 
nual return  to  the  community  on  the  investment.  Besides 
this  saving,  the  area  of  production  would  be  carried  from 
twenty  to  forty  miles  farther  into  the  interior.  From 
twenty  to  forty  miles  of  tributary  territory  with  all  its  pro- 
ductive resources  would  be  reclaimed,  and  the  income  over 
cost  of  production  within  the  marginal  circle  would  be  an 
additional  gain.  But  under  our  assumption,  oats  being 
the  only  crop,  when  the  fifty-mile  limit  had  been  reached 
by  the  dirt  road,  then  all  the  territory  outside  this  limit 
would  be  without  a  market.  "With  each  kind  of  crop,  the 
same  principle  would  apply,  limits  of  practical  activity 
being  determined  by  cost  of  production  and  market  price. 
The  advantage  to  be  gained  through  better  transportation 
facilities  not  only  explains  the  early  appropriations,  but  the 
early  acts  also  show  that  the  inducement  was  clearly  per- 
ceived; this  fact  being  set  forth  in  the  preambles  of 
many  of  the  acts  appropriating  money  for  local  improve- 
ments. 

4 


ECONOMIC  BASIS  OF  RAILROAD   INVESTMENT 

Advantage  of  Turnpike  Construction. — Convert  the  com- 
mon wagon  road  into  a  macadamized  pike  and  the  cost  of 
transportation  would  again  be  reduced  about  one-half.  On 
the  assumption  above,  over  sixteen  million  dollars  per  an- 
num would  be  saved  to  the  community  within  a  radius  of 
fifty  miles,  at  an  added  capital  cost  of  about  sixty-four 
million  dollars;  that  is,  some  twenty-five  per  cent,  could  be 
realized  by  the  community  on  the  investment  within  the 
area  previously  equipped  with  wagon  roads,  while  the  ra- 
dius of  profitable  production  would  again  be  extended. 
All  lands  within  from  sixty  to  eighty  miles  would  be 
brought  within  the  range  of  the  central  market.  True,  no 
such  uniformly  fertile  and  uniformly  developed  community 
exists,  and  as  a  result  turnpikes  were  built  only  as  trunk 
lines  through  the  best  producing  land  and  on  the  most 
traveled  routes.  But  the  principle  is  the  same,  and  the 
argument  quite  as  potent.  With  this  computation  in  mind, 
it  is  easy  to  understand  why  the  shares  in  some  instances 
were  subscribed  four  times  over  by  those  interested  in  ob- 
taining better  roads. 

How  Profits  Are  Divided. — Around  Philadelphia  were 
ordinary  mud  roads,  which  were  impassable  during  a  con- 
siderable portion  of  the  year.  The  western  terminus  of 
the  Lancaster  pike  was  to  be  in  the  Susquehanna  valley, 
and  a  large  and  fertile  territory  would  thus  be  opened  to 
trade  with  that  city.  The  business  of  merchants  would  be 
increased,  the  resources  of  the  country  would  be  more  fully 
developed,  and  industry  would  become  more  active.  It 
mattered  not  whether  the  profits  of  the  enterprise  were  to 
be  shared  by  the  subscribers  as  dividends  to  shareholders,  or 
whether  they  were  to  come  in  the  form  of  increased  business 
prosperity;  the  inducement  for  capitalization  was  present, 
and  the  plan  of  profit  sharing  was  important  only  in  deter- 
mining the  class  of  interests  to  which  appeal  was  to  be  made 
for  the  capital  necessary  for  the  improvement.    Certain  it 

5 


RAILROAD  FINANCE 

was  that  the  enterprise  would  be  a  fruitful  investment  to 
the  community  at  large.  If  the  subscriber  were  an  in- 
vestor (a  capitalist),  he  would  look  to  dividends;  he  would 
base  his  judgment  upon  the  rate  of  toll  which  would  bring 
to  the  corporation  the  largest  income.  If  he  were  a  mer- 
chant, a  manufacturer,  a  farmer,  or  a  legislator  represent- 
ing the  various  interests  of  the  state,  his  prime  motive 
might  be  that  of  reducing  rates  of  toll  as  a  means  of  ex- 
tending trade  or  industry  and  increasing  the  net  profits  of 
business.  An  effort  was  usually  made  to  draft  the  plan 
and  limit  the  tolls  in  such  manner  as  to  appeal  to  both 
classes.  That  this  calculation  was  ever  present  in  the 
minds  of  the  people,  as  well  as  a  guiding  principle  in 
legislative  action,  appears  not  only  from  the  contemporary 
press,  but  also  from  the  assembly  records  themselves.  The 
ever  present  question  was,  what  is  the  lowest  maximum 
rate  of  toll  which  will  leave  a  margin  sufficient  to  attract 
capital  to  the  enterprise?  In  some  instances,  the  toll  was 
fixed  at  a  definite  maximum  per  mile;  in  others,  greater 
latitude  was  left  to  the  company  for  the  exercise  of  discre- 
tion by  the  introduction  of  a  clause  limiting  profits  to  a 
maximum  rated  to  capitalization.  Still  other  charters  con- 
tained both  regulatory  provisions.  Thus  the  charter  of  the 
Eastern  and  Wilkesbarre  Turnpike  Road  company  in  1803 
prescribed  the  tolls,  and  limited  the  dividends  to  six  per 
cent,  on  the  shares.^  The  Uniontown  and  Cumberland  char- 
ter in  1804  prescribed  the  tolls  and  limited  the  dividends 
to  nine  per  cent,  on  the  shares.^  The  apportionment  of 
profits  was  a  compromise  by  which  a  very  large  percentage 
of  the  gain  was  distributed  to  the  general  community  in 
the  form  of  lower  rates,  a  certain  maximum  rate  of  toll 
being  given  to  the  company  as  a  source  of  dividend. 

Investment  Basis  of  the  Canal. — A  hundred  miles  of 
good  road  on  the  seacoast  was  but  a  narrow  fringe  when 
compared  with  the  network  of  traffic  lines  necessary  to 

2  Smith,  Laws  of  Pa.,  IV,  7.  a  ibid.,  IV,  141. 

6 


ECONOMIC  BASIS  OF  RAILROAD   INVESTMENT 

serve  a  great  stretch  of  inland  territory  which  could  not 
be  economically  reached  by  a  wagon  road.  Wheat  at  a  dol- 
lar a  bushel  may  not  be  hauled  with  profit  on  an  ordinary 
road  more  than  one  hundred  and  fifty  miles;  while  lum- 
ber, charcoal,  mineral  coal,  iron  ore,  hay,  and  grain  will 
permit  of  transportation  a  much  less  distance.  The  only 
solution  for  the  transportation  problem  for  a  large  portion 
of  the  interior,  therefore,  must  be  found  in  further  im- 
provement— better  equipment  and  lower  cost.  In  England 
the  canal  had  already  proved  of  benefit  to  the  producer  in 
the  form  of  lower  rates;  to  the  consumer  in  the  form  of 
lower  prices  for  goods  transported;  and  to  the  investor  in 
the  form  of  dividends.  By  means  of  a  canal  a  single  horse 
could  draw  from  ninety  thousand  to  one  hundred  and 
twenty  thousand  pounds  as  easily  as  two  thousand  pounds 
could  be  hauled  by  wagon  on  a  turnpike.  With  this  equip- 
ment one  horse  and  one  drayman  could  haul  as  much  as 
fifty  horses  and  fifty  carts  and  fifty  draymen.  In  the  most 
favorable  localities  the  capital  cost  of  a  canal  was  from 
three  to  five  times  greater  than  the  capital  cost  of  a  turn- 
pike. Where  the  lay  of  the  land  was  less  favorable  to 
canal  construction,  the  capital  cost  increased  in  proportion 
to  the  difficulties  of  excavation  and  the  cost  of  locks  to 
obtain  water  level. 

Advantage  in  the  Long  Haul. — This  large  capital  cost 
confined  the  advantages  of  canal  transportation  to  a  long 
haul.  Within  a  narrow  radius  the  saving  would  be  small ; 
in  the  well  settled  and  well  improved  districts,  the  average 
gross  return  from  an  acre  of  agricultural  land  might  not 
exceed  ten  dollars.  Assuming  that  on  a  turnpike  it  would 
cost  one  dollar  to  market  the  produce  of  an  acre  of  land 
ten  miles  distant,  the  saving  within  this  small  radius  would 
not  pay  the  interest  on  the  increased  capital  cost  of  a  canal. 
At  twenty  miles,  however,  under  exactly  similar  condi- 
tions, it  would  cost  two  dollars  per  acre;  at  fifty  miles 
the  cost  of  carriage  over  a  turnpike  would  be  five  dollars 

7 


RAILROAD  FINANCE 

per  acre.  The  advantage  to  the  producer  from  a  cheaper 
means  of  transportation  would  increase  directly  with  the 
distance,  and  at  fifty  miles  the  inducement  to  canal  con- 
struction would  be  five  times  as  great  as  at  ten  miles. 
From  fifty  to  one  hundred  miles  back  from  the  coast  or 
from  navigable  water,  every  interest  would  favor  canal 
construction  wherever  there  were  sufficient  resources  to 
warrant  the  expenditure. 

Immediately  after  the  Revolution  several  canals  were 
projected ;  and  Washington  was  active  in  the  promotion  of 
the  Potomac  company.  But  the  country  was  not  suffi- 
ciently developed  to  furnish  a  base  for  long  haul  opera- 
tions. With  the  beneficial  results  following  the  construc- 
tion of  the  first  canals,  there  arose  a  demand  for  a  means  of 
reaching  interior  points  which  were  beyond  the  range  of 
water  transportation.  For  a  large  portion  of  the  country 
some  improved  form  of  land  transportation  was  impera- 
tive, and  the  great  question  before  the  people  was  by  what 
means  this  could  be  obtained.  The  success  of  the  railroad 
in  England  furnished  the  answer  to  this  question. 

We  may  not  say,  therefore,  that  investment  in  the  early 
railroads  in  this  country  was  a  venture  in  the  dark.  The 
results  of  experiments  in  England  were  carefully  consid- 
ered, and  much  attention  was  given  to  the  study  and  exposi- 
tion of  the  economic  advantages  to  result  from  the  intro- 
duction of  the  railroad  in  particular  localities.  That  this 
is  true  may  be  shown  by  a  sentence  from  a  message  of 
Governor  Lincoln  of  Massachusetts,  in  which  he  considered 
the  proposed  Boston  and  Providence  railroad:  "From 
satisfactory  estimates,  and  calculations  upon  the  present 
travel  and  occasion  of  transportation,  the  net  receipts  from 
use  of  the  road,  after  deducting  all  charges  for  keeping  it 
in  repair,  carriages,  etc.,  and  upon  a  saving  of  one-half  in 
the  present  cost  of  transportation,  will  amount  to  a  sum 
exceeding  sixty  thousand  dollars  per  annum."    The  natural 


ECONOMIC  BASIS   OF  RAILROAD  INVESTMENT 

conclusion,  therefore,  was  "that  the  construction  of  the 
road  would  be  of  great  public  advantage,  and  a  profitable 
investment  of  capital. ' '  * 

This  estimate  was  made  for  a  well  settled  region, 
in  which  there  was  already  a  turnpike  road  which  trav- 
elers reported  the  best  in  America.  The  entire  length 
of  the  proposed  road  was  to  be  only  thirty  miles,  and  yet 
the  investment  value  was  considered  to  be  such  as  to  earn 
about  forty  per  cent,  on  the  cost  each  year.  A  portion  of 
this  was  to  go  to  the  general  community  in  the  form  of 
lower  rates;  the  remainder  was  to  go  to  those  furnishing 
the  capital  as  return  for  investment.  Estimates  of  similar 
nature  might  be  given. 

Effort  to  secure  a  fair  division  of  the  profits  which  might 
accrue  from  improved  methods  of  transportation  between 
the  producing  public  and  those  who  might  contribute  the 
funds  necessary  to  the  undertaking,  found  expression  in 
nearly  all  of  the  early  charters.  In  this  the  legislatures 
followed  the  practice  established  with  respect  to  turnpikes. 
Commercial  rivalry  between  important  trade  centers  was 
directly  encouraged ;  and  not  only  was  local  pride  and  com- 
munity interest  urged  as  a  reason  for  support,  but  the  in- 
vestor was  also  interested  through  promises  of  dividends 
to  be  realized  on  the  capital  necessary  to  construct  a  more 

*Xil€s,XXXIV,  9.  (1828.)  The  estimate  upon  which  this  state- 
ment was  based   follows: 

Income 
Passenger    traffic   equal   to    50,000   for    entire   trip    at    $1.00 

each    $50,000 

Freight  traffic  equivalent  of  8450  tons  entire  trip: 

4625  tons  at  $4.75  per  ton  ( 34,000 


3825  tons  at  $3.15  per  ton 


Total    $84,000 

Expenses 

Annual  expense  of  horses,  carriages,  drivers   $6,750 

Annual  expense  for  heavy  transportation    3,505 

Annual  ten  per  cent,  additional  for  covering  errors   .    1,025 

Expense  of  superintendence  making   repairs   4,000        15,280 

Net   income    $68,720 

9 


RAILROAD  FINANCE 


convenient   means  of  transporting  goods  and  passengers 
from  the  distant  interior. 

A  View  from  the  Interior. — The  manner  in  which  the  in- 
terior interests  regarded  improvements  of  this  kind  is  illus- 
trated by  a  letter  from  a  member  of  congress  to  Niles' 
Register:  "I  have  just  received  letters  from  two  of  ten  or 
fifteen  merchants  at  Wheeling,  who  state  that  they  alone 
have  forwarded  by  wagons  to  Baltimore,  on  the  Cumber- 
land road,  during  the  last  year,  3,000,500  lbs.  of  country 
produce,  tobacco,  etc.,  equal  to  about  1,750  tons;  loading 
perhaps,  900  or  1,000  wagons ;  and  one  of  the  gentlemen  ex- 
presses the  confident  opinion  that  if  the  cost  of  transporta- 
tion were  reduced  ^  or  ^,  there  would  be  forwarded  from 
that  place  alone  and  the  neighborhood  (independent  of  all 
produce  of  the  rich  and  productive  country),  at  least 
200,000,000  lbs.  or  100,000  tons  of  produce  annually. 
Such  has  been  the  effect  of  the  Cumberland  road,  and  such 
w^ould  be  the  effect  of  a  railroad  from  Baltimore  to  the 
Ohio,  at  Wheeling  or  Pittsburg."  ^ 

5  Niles,  XXXIII,  18.  (1828.)  The  following  statement,  com- 
piled in  England,  showing  the  advantage  of  the  railway  over  the 
common  road,  was  used  by  promoters  in  this  country: 


CO 
03 

o 
H 

Expense 
Railway 

Expense  by 

Common 

Road 

Difl'erence 
in  Favor  of 
Railway 

Twenty- Year 
Purchase  of 
Difl'erence 

Thirty- 
Year  Pur- 
chase of 
Difference 

£ 

s.  d. 

£   s.  d. 

f   s.  d. 

£ 

£    s. 

1 

2,082 

242 

12  6 

856  17  6 

614  5  0 

12,285 

18,427  10 

2 

4,1()4 

485 

5  0 

1713  15  0 

1228  10  0 

24,570 

36.855  0 

3 

5,246 

727 

17  0 

2570  12  6 

1842  15  0 

36,855 

55,855  10 

4 

8,328 

970 

9  6 

3427  10  0 

2457  0  0 

49,140 

73,710  0 

5 

10,410 

1213 

2  0 

4284  7  6 

3071  5  0 

61,425 

92,137  10 

6 

12,492 

1455 

14  6 

5141   5  0 

3685  10  0 

73,710 

110.565  0 

7 

14,575 

1(198 

7  0 

5998  2  0 

4299  15  0 

85,995 

128,992  10 

8 

1«,(!5(; 

1940 

19  0 

0855  0  0 

4914  0  0 

93,280 

147.420  0 

9 

18,738 

2183 

12  0 

7711  18  4 

5528  5  0 

110,565 

lt;.->,S47  10 

10 

20,820 

2420 

4  6 

8568  15  0 

6142  10  0 

122,850 

184,275  0 

10 


ECONOMIC  BASIS  OF  RAILROAD   INVESTMENT 

Advantage  of  the  Railroad  Over  the  Canal. — The  intro- 
duction of  the  steam  locomotive  gave  to  the  railroad  its 
advantage  over  the  canal.  Time  in  transportation  is  one 
of  the  chief  elements  of  cost.  A  saving  of  time  is  a  saving 
of  expense.  The  railroad  makes  possible  the  transportation 
of  many  products  which  otherwise  might  not  be  mar- 
keted at  all — products  which  deteriorate  rapidly  with  age. 
By  the  introduction  of  the  canal  and  the  railroad, 
the  margin  of  profitable  industry  was  extended  a  thousand 
or  fifteen  hundred  miles  inland.  The  saving  of  time 
made  by  the  adoption  of  steam  locomotion  brought  the 
resources  of  the  continent  in  touch  with  the  common  market 
place. 

As  late  as  1817  it  was  stated  in  a  report  to  the  New 
York  legislature  that  the  cost  of  transporting  a  ton  of 
freight  from  Buffalo  to  New  York  was  one  hundred  dollars, 
or  twice  the  value  of  wheat  at  Buffalo  and  four  times  the 
value  of  corn.*^  The  advantage  to  be  capitalized  in  provid- 
ing some  cheaper  mode  of  transportation  from  the  Great 
Lakes  to  the  Hudson  was  therefore  apparent.  With  the 
building  of  canals,  transportation  costs  were  greatly  re- 
duced, but  their  construction  absorbed  so  much  capital  that 
they  could  be  employed  to  advantage  only  upon  long  dis- 
tance traffic.  Within  any  short  radius,  productive  possi- 
bilities were  so  limited  that  the  saving  from  the  introduc- 
tion of  artificial  waterways  was  too  small  to  warrant  their 
construction.  The  introduction  of  canals,  therefore,  neces- 
sarily resulted  in  greatly  enlarging  the  territory  tributary 
to  the  marketing  centers  which  they  were  built  to  serve,  but 
they  could  not  effectively  serve  that  great  interior  from 
which  the  products  of  American  industry  were  to  come. 
This  was  to  be  reached  by  some  mechanical  means  which 
could  serve  each  of  the  small  areas  of  the  continent.  Th« 
railroad  furnished  the  solution  of  the  problem.  Tire 
character  of  appeal  made  to  the  community  for  the  support 

^Hunt,  LX,  161. 

11 


RAILROAD  FINANCE 

of  railroad  projects,  and  the  economic  basis  for  their  cap- 
italization,  is  illustrated  by  the  following:^ 

Table  Showing  the   Value   Per  Ton   of  Wheat   and   Corn   at 

Different   Distances   from    Market — Upon   a   Railroad 

AND  Upon  a  Common  Road 


MILES 

railroad 

ordinary 

road 

Wheat 

Corn 

Wheat 

Corn 

0     (At    Market) 

10    

49.50 
49.25 
49.20 
49.05 
49.00 
48.75 
48.00 
47.25 
47.10 
4(5.95 
40.50 
45.75 
45.00 
44.70 
44.55 

24.75 
24.00 
24.45 
24.30 
24.15 
24.00 
23.25 
22.50 
22.35 
22.20 
21.75 
21.00 
20.25 
19.95 
19.80 

49..50 
48.00 
45.50 
45.00 
43.50 
42.00 
34.50 
27.00 
25.50 
24.00 
19.50 
12.00 
4.50 
1.50 

24.75 
23.25 

20     

21.75 

30    

40    

50     

20.25 
18.75 
17.25 

100     

9.75 

150     

2.25 

160     

.75 

170     

200     

250     

300     

320     

330     

Thus  a  ton  of  corn  one  hundred  and  seventy  miles  from 
market  was  not  worth  hauling  over  a  common  road,  but  its 
value  w^hen  rail  carriage  was  possible  was  $22.20.  And  a 
ton  of  wheat  while  not  worth  the  cost  of  a  wagon  haul  of 
three  hundred  and  thirty  miles,  by  the  very  fact  of  the 
existence  of  a  connecting  line  of  railroad  was  worth  $44.55. 
Admitting  that  it  must  have  been  based  upon  a  rough  ap- 
proximation, such  a  showing  as  this  contributes  toward  a 

T  Ibid.,  XXIX,  377;  Amer.  Railroad  Jour.,  XXV,  705-6,  928-9. 

12 


ECONOMIC  BASIS  OF  RAILROAD   INVESTMENT 

better  understanding  of  the  spirit  which  animated  those 
who  supported  the  early  railroad  ventures.  Although 
many  problems  remained  to  be  worked  out,  and  the  future 
could  not  be  clearly  seen,  the  one  fact  that  the  railroad 
presented  itself  as  so  tremendously  effective  an  instrument 
of  trade  compelled  its  adoption.  "It  is  not  merely  because 
his  supreme  happiness  consists  in  that  speed  which  anni- 
hilates time  and  space,"  wrote  Chevalier  in  1835,  "it  is  also 
because  he  perceives,  for  the  American  always  reasons,  that 
this  mode  of  communication  is  admirably  adapted  to  the  vast 
extent  of  his  country,  to  its  great  maritime  plain,  and  to 
the  level  surface  of  the  Mississippi  valley,  and  because  he 
sees  all  around  him  in  the  native  forests,  abundance  of  ma- 
terials for  executing  these  works  at  a  cheap  rate.  This  is 
the  reason  why  railroads  are  multiplied  in  such  profusion, 
competing  not  onl}'  with  each  other,  but  entering  into  a 
rivalry  with  rivers  and  canals. ' '  ® 

«  Chevalier,  "Society,  Manners  and  Politics  in  the  United  States," 
337. 


CHAPTER  II 

PROMOTION  AND  UNDERWRITING! 

Promotion  and  Exploitation. — The  methods  of  railroad 
promotion  have  varied  widely  in  different  sections  of  the 
country  and  at  different  periods  in  our  railroad  history. 
In  relatively  few  instances  were  the  early  railroads  pro- 
moted for  purely  speculative  purposes.  True,  many  of  the 
early  lines,  connecting  neighboring  towns,  were  built  be- 
cause they  were  expected  to  increase  the  activity  of  local 
trade;  but  the  motive  soon  changed.  "Railroads,"  wrote 
Wellington,  "are  not  undertaken  unless  they  are  expected 
to  be  profitable,  not  to  the  general  public,  nor  to  other  par- 
ties in  the  near  or  distant  future,  not  to  those  who  lend 
money  on  them,  but  to  those  who  at  first  control  the  enter- 
prise."^ Many  of  the  early  railroads  were  financed  locally 
and  on  a  conservative  basis,  but  it  was  not  long  before  the 
magnitude  of  individual  projects  made  the  use  of  outside 
capital  necessary.  From  promotion  to  exploitation  is  little 
more  than  a  step.  If  there  was  profit  in  projecting  and 
building  a  well  constructed  railroad  by  those  who  con- 
trolled its  operation  afterwards,  how  much  greater  ap- 
peared the  prospect  of  profit  to  those  who  could  build  as 
cheaply  as  possible  and  sell  out  their  interest  at  speculative 
prices!  This  was  encouraged  by  the  attitude  of  govern- 
mental authorities.  When,  as  was  often  the  case,  promo- 
ters were  able  to  obtain  government  aid,  whether  in  the 
form  of  grants  of  land,  loans,  investments  in  shares,  tax- 
exemptions,  or  special  privileges,  the  temptation  to  exploi- 

1  For  fuller  description  of  methods  of  promotion,  see  Cleveland 
and  Powell,  "Railroad  Promotion  and  Capitalization  in  the  United 
States." 

2  Wellington,  "Economic  Theory  of  the  Location  of  Railways,"  15, 

14 


PROMOTION  AND  UNDERWRITING 

tation  often  became  too  strong  to  be  resisted.  Fortunately, 
the  expected  reward  was  not  always  forthcoming;  so  while 
the  instances  of  exploitation  have  been  far  too  many,  it 
may  be  said  of  the  typical  ease  of  railroad  promotion,  again 
quoting  from  Wellington,  that  "If  the  means  in  hand  be 
not  sufficient  for  the  projectors  to  complete  the  road  for 
operation  and  to  control  the  operation,  afterwards,  the  re- 
sult to  them  is  usually  complete  loss.'"  It  may  be  said 
also,  that  those  who  have  contributed  the  capital  which  has 
gone  into  the  construction  and  equipment  of  American  rail- 
roads have  done  so  in  the  belief  either  that  their  securities 
would  yield  a  safe  and  profitable  return  or  that  other  en- 
terprises in  which  the,y  were  also  interested  would  thereby 
become  more  profitable. 

Surveys. — Omitting  from  consideration  those  exceptional 
instances  in  which  railroad  projects  have  been  the  out- 
growth of  intense  local  or  sectional  feeling,  which  con- 
cerned itself  little  with  matters  of  topography,  the  first 
step  in  the  promotion  of  a  railroad  is  the  reconnaissance 
or  general  examination  of  the  territory.  This  is  intended 
to  determine  the  relative  advantages  of  the  various  possible 
routes,  particular  attention  being  given  to  the  possibility 
of  local  financial  support,  connections  with  other  transpor- 
tation lines,  and  the  prospect  of  industrial  development. 
As  one  or  both  terminals  are  usually  fixed  at  the  outset 
by  either  physical  or  commercial  considerations,  the  range 
of  choice  is  limited  to  the  determination  of  the  exact  region 
to  be  traversed.  The  preliminary  survey,  which  comes 
after  the  reconnaissance,  is  an  instrumental  examination 
of  the  territory  for  the  purpose  of  obtaining  data  which 
will  serve  as  the  basis  for  final  determination  of  the  route. 
Sometimes  several  preliminary  surveys  are  found  neces- 
sary. Finally  the  locating  survey  is  made,  to  fix  the  lines 
for  the  guidance  of  the  construction  forces,  and  to  obtain 

a  Ibid. 

15 


RAILROAD  FINANCE 

detailed  information  for  use  as  the  basis  of  proposals  for 
contracts. 

Location  and  Operating  Efficiency. — It  is  the  problem  of 
location  to  place  the  line  so  that  the  largest  volume  of  traf- 
fic may  be  handled  at  a  minimum  of  expense.  While  the 
early  railroads  were  generally  built  with  emphasis  upon 
low  construction  cost,  it  is  the  modem  practice  to  spare  no 
initial  expense  which  will  result  in  low  cost  of  operation. 
The  task  of  the  engineer  is  therefore  more  difficult,  some- 
times requiring  years  of  constant  work  before  an  accept- 
able plan  is  presented.  The  result  is  apparent  in  the  lower 
grades  and  fewer  curves  of  the  new  railroads  compared 
with  their  competitors  which  were  built  according  to  the 
methods  of  a  former  generation.  It  is  also  apparent  in 
higher  operative  efficiency,  lower  maintenance  charges,  and 
more  favorable  statements  of  net  earnings. 

Incorporation. — As  soon  as  a  project  is  definitely  under 
way,  application  is  made  to  the  state  for  a  charter  or 
articles  of  incorporation,  a  document  which  formally  de- 
fines the  powers,  duties,  and  limitations  of  the  persons 
associated  in  the  undertaking.  Upon  the  group  as  a  unit 
is  conferred  the  right  of  corporate  identity  either  for  a 
definite  period  or  in  perpetuity,  the  right  of  eminent  do- 
main, and  authority  to  perform  all  the  necessary  functions 
of  a  railroad,  together  with  the  privilege  of  limited  lia- 
bility. The  limitations  of  authority  are  also  stated,  and 
the  duties  of  the  corporation  to  the  state,  to  the  public,  and 
to  individuals  are  set  forth.  Most  of  the  early  railroad 
charters  were  granted  by  special  act  of  a  state  legislature, 
but  more  recently  the  practice  in  most  states  is  to  incor- 
porate under  general  laws.  Under  the  old  system  of  spe- 
cial charters  it  was  only  necessary  to  go  before  a  legisla- 
ture with  a  petition  stating  the  purpose  of  the  enterprise, 
the  probable  advantage  to  the  public,  and  the  powers  de- 
sired.    There   was   ample   opportunity  for   lobbying   and 

16 


PROMOTION  AND  UNDERWRITING 

bribery,  and  applicants  for  valuable  privileges  were  often 
not  unwilling  to  reward  liberally  those  whose  support  they 
were  able  to  obtain.  The  present  system  of  incorporation 
under  general  law  requires  the  petitioners  for  a  charter 
to  comply  with  certain  conditions  specified  in  the  act,  and 
upon  evidence  that  this  has  been  done,  a  certificate  is  issued 
as  a  matter  of  administrative  form.  Under  the  old  system, 
also,  it  was  the  practice  to  specify  by  name  in  the  charter 
a  number  of  commissioners  who  were  charged  with  the  duty 
of  receiving  subscriptions  to  shares.  In  this  manner  the 
prominent  citizens  of  a  locality  could  be  made  to  appear 
as  sponsors  for  the  project.  Subscriptions  must  now  be 
obtained  before  articles  of  association  are  filed  with  the 
secretary  of  state,  and  the  prominent  names  appear  at  the 
head  of  the  subscription  list.  The  general  powers  and 
privileges  are  no  longer  set  forth  in  the  articles  filed  by 
incorporators,  since  they  are  contained  in  the  law  itself. 
In  other  respects  the  old  and  the  new  methods  of  incor- 
poration are  similar.  Many  states  have  granted  special 
charters  even  after  having  enacted  general  laws  of  incor- 
poration ;  a  practice  which  in  some  states  is  now  forbidden 
by  the  constitution. 

Monopoly  and  Banking  Privileges. — The  special  privi- 
leges which  were  granted  by  special  act  of  legislature  were 
usually  such  as  could  be  capitalized.  IMany  of  the  early 
charters  contained  a  provision  that  the  legislature  would 
not  grant  a  charter  for  a  railroad  over  a  competing  route 
until  after  the  expiration  of  a  certain  period,  usually  be- 
tween twenty  and  thirty  years.  Banking  privileges  were 
conferred  upon  many  railroad  corporations,  not  only  in  the 
West  and  South,  but  even  in  New  England.  Vermont  in 
1836  incorporated  the  Rutland  Railroad  bank  to  be  estab- 
lished at  Rutland  with  a  capital  of  $250,000.  Said  the 
charter:  "No  operations  shall  be  commenced  at  said  bank, 
until  the  said  number  of  two  thousand  five  hundred  shares 
3  17 


RAILROAD  FINANCE 

shall  be  subscribed,  and  the  sum  of  one  hundred  and 
twenty-five  thousand  dollars  of  said  capital  stock  be  paid 
into  said  bank,  and  until  the  stockholders  of  the  Rutland 
and  Whitehall  Rail  Road  shall  have  actually  commenced 
the  construction  of  said  Rail  Road,  and  have  expended  one 
hundred  thousand  dollars  in  the  construction  of  the  same." 
Also,  "No  person  shall  have  the  right  of  subscribing  to 
the  capital  stock  of  said  bank,  until  he  shall  have  sub- 
scribed for  the  same  number  of  shares  of  the  capital  stock 
of  the  Rutland  and  Whitehall  Rail  Road,  as  he  may  sub- 
scribe to  the  capital  stock  of  said  bank. ' '  *  And  Connecti- 
cut in  1832  chartered  the  Quinnebaug  bank  of  Norwich  as 
an  adjunct  of  the  Boston,  Norwich,  and  New  London  rail- 
road.^ In  so  doing  these  states  were  not  less  conservative 
than  their  neighbors ;  for  Maine,  Rhode  Island,  New  York, 
and  New  Jersey  granted  banking  privileges  to  canal  com- 
panies between  1824  and  1835. 

Tax  Exemptions. — Exemption  from  taxation  was  com- 
monly granted  in  the  early  railroad  period,  usually  for  a 
term  of  years  or  until  a  certain  dividend  upon  the  share 
capital  should  be  declared.  Partial  tax  exemption  was  also 
common,  a  small  percentage  tax  upon  earnings  being  im- 
posed. Sometimes  this  small  tax  was  imposed  after  the 
expiration  of  the  period  for  which  absolute  exemption  had 
been  granted. 

Local  Subsidy  Enabling  Acts. — Legislative  authority  is 
required  before  counties,  cities,  or  towns  may  grant  subsi- 
dies to  railroads.  Authority  to  subscribe  to  railroad  shares 
implies  power  to  tax  to  raise  funds  for  the  payment  of  the 
subscription,  but  the  right  to  levy  in  payment  of  bonds 
issued  can  be  conferred  only  by  express  grant.  Local  sub- 
sidy enabling  acts  may  be  either  special  or  general  laws, 
and  special  laws  may  provide  for  aid  from  a  specific  county 

4L.   1836,  c.  38. 

0  Resolves  and  Private  Laws  of  Conn.,  1789-183G,  I,  137. 

18 


PROMOTION  AND  UNDERWRITING 

or  town  or  to  a  specific  railroad.  Whatever  the  form  of 
act,  the  effect  has  been  to  confer  a  valuable  privilege  upon 
the  railroads  concerned. 

METHODS  OF  APPEAL  FOR  FINANCIAL  SUPPORT 

The  Prospectus. — The  variety  of  methods  of  appeal  for 
financial  support  to  railroad  projects  has  exhausted  the 
range  of  possibilities.  The  prospectus,  whether  printed  in 
the  advertising  columns  of  periodicals  or  published  in 
pamphlet  form,  contains  descriptive  matter  aiming  to  show 
the  proposition  in  its  most  favorable  light.  It  contains 
also  such  collateral  information  and  testimonials  as  may 
appeal  to  the  imagination  of  the  man  with  money  to  invest 
or  venture.  Reports  of  surveys  have  always  constituted 
the  essential  part  of  the  prospectus  literature;  and  basing 
their  arguments  upon  the  materials  thus  presented, 
speakers  at  public  meetings  and  writers  in  local  news- 
papers have  aroused  popular  interest  and  by  constant 
reiteration  have  succeeded  in  spreading  the  facts  broad- 
cast. 

Public  Meetings. — From  the  first  it  was  the  practice  of 
American  communities  to  call  public  meetings  for  the  dis- 
cussion of  matters  of  common  concern;  and  it  was  only 
following  precedent  when  the  early  railroad  promoters  got 
the  people  together  to  consider  their  projects.  At  these 
meetings  subscription  lists  were  circulated,  and  favorable 
resolutions  were  adopted.  Committees  were  appointed  to 
prepare  addresses  to  the  people,  and  to  present  memorials 
to  city  councils  and  state  legislatures  praying  for  govern- 
ment aid.  Committees  were  appointed  also,  to  correspond 
with  similar  committees  elsewhere,  for  the  purpose  of 
obtaining  additional  information  and  of  enlisting  support 
from  towns  along  the  proposed  route.  Delegates  were 
appointed  to  attend  conventions  at  Avhich  representatives  of 
several  towns  might  pledge  their  united  support.     As  early 

19 


RAILROAD  FINANCE 

as  1831  we  are  told  that  in  New  York  state,  "It  m  almost 
impossible  to  open  a  paper  without  finding  an  account  of 
some  railroad  meeting.  An  epidemic  on  that  subject  seems 
nearly  as  prevalent  throughout  the  country  as  the  influ- 
enza."® This  was  also  the  testimony  of  a  Georgia  editor, 
who  two  years  later  wrote:  "We  now  hear  of  meetings  all 
around  us,  companies  are  being  organized,  and  plans  sys- 
tematized for  projecting  and  maturing  objects  of  improve- 
ment."^ 

The  Press  %nd  the  Pulpit. — Local  newspapers  were  usu- 
ally active  supporters  of  railroad  projects,  and  both  in 
their  news  columns  and  in  their  editorials  contributed  gen- 
erously to  the  campaign  of  education.  Many  of  the  jour- 
nals of  general  circulation  and  influence  also  lent  their 
aid  to  railroad  enterprise.  In  j\Iassachusetts  even  the  in- 
fluence of  the  pulpit  was  given  to  the  support  of  the 
Western  railroad,  in  response  to  a  general  request  for  dis- 
courses upon  the  moral  effects  of  railroads. 

House  to  House  Canvass. — Finally  there  was  the  direct 
appeal  of  man  to  man.  A  house  to  house  canvass  was 
undertaken  in  Philadelphia  to  procure  subscriptions  to  the 
shares  of  the  Pennsylvania  railroad.  Boston  was  thor- 
oughly canvassed  in  the  interest  of  the  Western  railroad 
of  Massachusetts.  The  supply  of  ready  capital  in  New 
England  caused  promoters  elsewhere  to  send  their  agents 
there  to  dispose  of  shares  which  they  could  not  sell  in  the 
territory  to  be  served.  In  many  instances  agents  were  sent 
to  towns  where  they  had  lived,  to  induce  old  acquaintances 
to  subscribe. 

The  Banker  as  a  Financial  Agent. — As  promotive  enter- 
prise became  less  local,  however,  there  was  a  general  transi- 
tion from  the  almost  primitive  methods  which  have  been 
outlined  to  the  use  of  established  financial  institutions  for 

6  Quoted  by  Mott,  "Between  the  Ocean  and  the  Lakes,"  9 ;  from 
the  Independent  Republican,  Goshen,  N.  Y.,  Dec.  26,  1831. 

t  Southern  Banner,  Sept.  14,  1833,  from  the  Macon  Messenger. 

20 


PROMOTION  AND  UNDERWRITING 

the  raising  of  capital.  Shares  were  put  on  sale  by  banking 
houses  in  New  York,  Boston,  Philadelphia,  and  other  finan- 
cial centers,  and  through  these  financial  agencies  European 
capital  was  attracted  to  investment  in  American  railroads; 
though  it  was  long  before  Europeans  could  be  induced  to 
invest  to  any  extent  even  in  bonds  unless  those  securities 
bore  the  endorsement  of  public  authority. 

Appeal  to  the  Creditor  Class  of  Investors. — The  inves- 
tors of  the  creditor  class  are  more  difficult  to  reach  than 
those  who  are  willing  to  put  their  money  into  shares.  The 
offer  of  a  share  in  proprietorship,  with  the  prospect  of  a 
proportionate  share  in  the  increased  value  of  the  business, 
and  direct  participation  in  the  profits,  is  sufficient  induce- 
ment to  the  average  man.  But  the  appeal  to  the  creditor 
must  stand  the  test  of  thorough  investigation  and  sober 
judgment.  The  only  thing  offered  is  the  right  to  a  pre- 
determined rate  of  interest  and  repayment  of  the  principal. 
The  method  of  appeal  must  be  such  as  to  appeal  to  analyti- 
cal instead  of  creative  and  imaginative  minds.  The 
security  must  be  ample;  the  rate  of  return  must  be  attrac- 
tive. When  such  an  investment  is  made,  the  investor  must 
either  have  facilities  for  investigation,  or  the  sale  must  be 
arranged  through  agents  who  have  a  reputation  to  sustain 
— a  bond  house  or  its  accredited  representatives,  a  bank,  or 
a  trust  company.  So  accustomed  is  the  creditor  class  to 
this  manner  of  dealing  that  it  is  with  the  utmost  difficulty 
that  even  an  issue  of  municipal  or  government  bonds  can 
be  disposed  of  without  the  use  of  such  intermediaries. 

UNDERWRITING  AND  HOLDING  SYNDICATES 

The  "Financial"  Banker. — The  financial  agent  of  to-day 
is  a  banker,  but  a  banker  in  a  different  sense  from  what  is 
ordinarily  understood  by  the  term.  His  function  is  that 
of  the  middleman,  supplying  customers  with  investments, 
and  thereby  providing  purchasers  for  the  securities  of  cor- 

21 


RAILROAD  FINANCE 

poratioiis  which  are  seeking  capital.  He  ''finances"  new 
enterprises,  furnishing  funds  for  the  expenses  of  organiza- 
tion, with  the  assurance  that  his  standing  in  the  financial 
world  is  such  as  to  enable  him  to  place  the  securities  when- 
ever market  conditions  warrant. 

Conditions  Precedent  to  Accepting  Bisk. — Before  a  bank- 
ing house  will  advance  money  in  aid  of  a  project,  or  under- 
take to  market  securities,  it  usually  will  require  that  an 
exhaustive  examination  be  made  into  its  condition  and  pros- 
pects. If  the  finding  is  satisfactory,  and  the  general  indus- 
trial, financial  and  stock-market  conditions  are  favorable, 
the  details  of  the  financing  will  be  worked  out  in  confer- 
ence. Here  the  wide  experience  of  the  banker  and  his  inti- 
mate knowledge  of  financial  affairs  make  his  judgment  final 
as  to  the  form  of  security  to  be  offered,  the  amount  to  be 
issued,  and  the  price.  If  the  financial  market  is  under- 
going a  depression  and  there  is  already  a  surfeit  of  new 
capital  issues  awaiting  the  demands  of  investors,  a  new 
proposition  will  receive  little  consideration,  or  will  be  de- 
ferred indefinitely;  and  it  is  the  ability  of  the  banker  thus 
to  sense  market  conditions  which  protects  his  house  and  its 
clientele.  Every  banking  house  has  among  its  customers, 
investors  who  rely  absolutely  upon  its  advice  in  the  matter 
of  investments.  Some  can  always  be  counted  upon  to  take 
an  interest  in  any  new  security  which  is  thus  recommended. 
When,  therefore,  a  new  project  is  of  sufficient  promise  to 
induce  the  bank  to  handle  its  securities,  its  chances  of  suc- 
cess are  good. 

Profits  of  Financing. — The  charge  of  the  banker  for  this 
service  will  vary  with  the  circumstances  of  each  issue,  rang- 
ing from  two  and  a  half  per  cent,  if  the  securities  are 
merely  placed,  to  ten  per  cent,  if  their  sale  is  guaranteed. 
Not  infrequently  a  bonus  is  also  exacted  in  the  form  of 
shares  or  junior  bonds.  The  first  mortgage  bonds  are  sold ; 
but  as  the  other  securities  usually  have  little  immediate 

22 


PROMOTION  AND  UNDERWRITING 

value,  they  are  held  until  with  the  development  of  business 
the  revenues  of  the  new  company  warrant  a  return  upon  its 
inferior  securities.  This  furnishes  the  banker's  oppor- 
tunity. With  the  control  Avhich  his  ownership  of  the 
securities  affords,  he  can  determine  the  time  and  the 
amount  of  the  division  of  profits.  It  is  therefore  an  easy 
matter  for  him  to  unload  his  holdings  at  a  figure  which 
will  allow  a  return  for  his  expert  counsel,  his  position  of 
advantage  in  financial  circles,  and  the  risk  attending  the 
advancement  of  funds  by  his  customers. 

It  is  a  matter  of  great  convenience  for  a  railroad  which 
is  bidding  for  capital  to  obtain  it  in  bulk  through  the  sale 
of  an  entire  issue  of  securities  to  a  single  buyer.  It  is 
important,  furthermore,  to  have  the  assurance  that  the 
funds  will  be  forthcoming  at  the  time  they  are  needed,  re- 
gardless of  the  fluctuating  conditions  of  the  market.  It  is 
customary,  therefore,  to  obtain  an  agreement  which  will  in- 
sure this  end.     This  practice  is  known  as  "underwriting." 

What  is  JJnderivriting? — The  term  "underwrite"  im- 
plies the  assumption  of  a  risk,  and  as  employed  in  finance 
it  signifies  the  insuring  or  guaranteeing  of  a  market  for 
securities.  This  is  a  contract  under  which  the  banker 
agrees  to  take  an  issue  of  securities  at  a  specified  time  and 
price.  The  banker  disposes  of  these  securities  as  oppor- 
tunity offers,  suffering  the  loss  if  they  have  to  be  kept  for 
a  long  period,  or  if  they  must  be  sold  below  the  purchase 
price.  Where  only  a  few  millions  are  involved  a  single 
bank  may  conduct  the  underwriting,  but  when  business  is 
offered  which  is  larger  than  one  bank  can  prudently  handle, 
a  syndicate  may  be  formed  to  divide  the  risk.  The  con- 
tract with  the  issuing  corporation  is  first  arranged  in  all 
its  details.  The  bank  now  appears  as  syndicate  manager ; 
but  two  or  more  banks  often  act  as  joint  managers. 

The  Underwriting  Syndicate. — The  underwriting  syndi- 
cate as  we  know  it  was  first  employed  in  this  country  in 

23 


RAILROAD  FINANCE 

1871  in  connection  with  the  sale  of  United  States  bonds  by 
Jay  Cooke,  who  had  made  a  study  of  the  working  of  the 
French  syndicats  while  negotiating  for  the  sale  of  Northern 
Pacific  bonds  in  Europe.*  Its  use  in  England  appears  to 
date  from  about  the  same  time ;  for  in  1873  the  London 
Economist  called  attention  to  the  frequent  references,  "ol 
late  years"  to  syndicates,  especially  in  connection  with  the 
marketing  of  new  securities.  It  also  gave  this  definition. 
"An  association  of  persons  who  guarantee  the  subscription 
of  the  issue  either  wholly  or  partially,  each  guarantor 
usually  accepting  the  responsibility  for  so  much  to  the 
actual  contractors. ' '  ^ 

Preliminary  to  the  organization  of  a  syndicate,  the  man- 
ager will  send  out  notices  to  other  banks  and  to  individuals 
well  known  to  them,  describing  the  nature  of  the  under- 
taking and  inviting  participation ;  or,  as  is  more  often  the 
case,  giving  notice  that  certain  allotments  of  securities  have 
been  reserved.  Participation  in  a  syndicate  is  a  privilege 
which  is  granted  only  to  those  whose  influence  will  serve  to 
widen  the  market  for  the  securities,  or  whose  good  will  as 
large  purchasers  of  securities  it  is  advantageous  to  get  and 
retain.  It  is  obvious  that  a  well  distributed  underwriting 
is  a  source  of  strength  in  marketing  securities,  because  each 
participant  may  be  counted  upon  to  do  everything  possible 
to  create  a  demand  and  dispose  of  the  issues  to  its  clientele. 
Upon  acceptance  of  an  interest  in  the  venture  the  formal 
agreement  is  sent  to  each  participant  or  underwriter  for  his 
signature.  Usually  there  is  little  hesitation  over  the  mat- 
ter of  acceptance  if  a  strong  house  has  undertaken  to 
underwrite,  for  to  decline  an  allotment  would  remove  one's 
name  from  the  list  which  will  be  used  in  organizing  future 
syndicates. 

Underwriting  originally  took  the  form  of  an  obligation 
on  the  part  of  participants  to  take  within  a  specified  time 

'  Oberholtzer,  "Jay   Cooke,"  II,  275.        »  Economist.  XXXI,  994. 

24 


PROMOTION  AND  UNDERWRITING 

and  at  a  specified  price  such  securities  as  had  not  been  dis- 
posed of  by  the  manager,  in  proportion  to  the  several 
amounts  underwritten.  In  1903  the  Pennsylvania  rail- 
road announced  an  increase  in  its  share  capital  of  from 
$251,000,000  to  $400,000,000.  When  the  outstanding 
shares  were  quoted  at  143,  the  directors  offered  to  share- 
holders the  privilege  of  subscribing  to  $75,000,000  of  the 
new  issue  at  120.  At  that  time  it  was  not  thought  desir- 
able to  secure  an  underwriting.  But  the  old  shares  having 
fallen  to  125,  and  the  full  quota  of  shareholders'  subscrip- 
tions not  having  been  obtained,  it  was  necessary  to  resort 
to  bankers,  who  guaranteed  subscriptions  to  all  the  shares 
at  120  in  consideration  of  a  commission  of  two  and  a  half 
per  cent,  on  the  entire  issue.  The  announcement  of  this 
agreement  had  the  effect  of  causing  the  shareholders  to 
accept  their  privilege.  The  advantage  to  the  company  is 
shown  by  the  fact  that  within  the  year  Pennsylvania  shares 
were  sold  as  low  as  111. 

The  Union  Pacific  in  1907  offered  $75,000,000  of  four  per 
cent,  convertible  bonds  at  90  to  shareholders  at  the  rate  of 
one  bond  for  forty  shares.  In  order  to  insure  the 
success  of  the  issue,  an  underwriting  syndicate  was  formed 
which  guaranteed  the  placing  of  the  bonds  in  return  for  a 
fee  of  $1,875,000,  of  which  $375,000  went  to  Kuhn,  Loeb, 
and  company  as  syndicate  managers.  Almost  immediately 
a  decline  in  Union  Pacific  set  in,  and  before  the  subscrip- 
tion date  the  new  bonds  were  quoted  below  the  price  at 
which  they  had  been  offered  to  the  shareholders,  finally 
reaching  a  fraction  above  78.  Only  $2,000,000  of  the  bonds 
were  taken  by  the  shareholders;  and  while  the  company 
received  its  money,  the  syndicate  was  compelled  to  take 
over  almost  the  entire  issue.  The  Atchison,  Topeka,  and 
Santa  Fe,  in  order  to  provide  funds  for  improvements,  in- 
vited its  shareholders  in  1907  to  take  at  par  $26,000,000 
of  five  per  cent,  convertible  bonds  to  the  extent  of  twelve 

25 


RAILROAD  FINANCE 

per  cent,  of  their  holdings.  No  underwriting  of  any  kind 
was  provided.  As  the  market  fell  these  bonds  were  quoted 
below  90,  and  less  than  $9,000,000  were  disposed  of  at  that 
time. 

The  Holding  Syndicate. — According  to  this  method  of 
underwTiting  there  need  be  no  advance  of  casli  in  case  the 
entire  issue  is  disposed  of,  and  each  participant  would  re- 
ceive a  commission  of  from  two  and  a  half  to  five  per  cent, 
upon  his  maximum  risk.  But  frequently  some  time  must 
elapse  after  the  agreement  is  entered  into  before  it  is  con- 
sidered expedient  to  offer  the  securities  for  sale.  In  such 
a  case  a  purchasing  syndicate  is  formed,  and  the  securities 
are  distributed  among  the  participants  of  the  purchasing 
syndicate  as  soon  as  they  are  delivered.  By  this  method 
the  money  required  to  finance  the  enterprise  must  first  be 
advanced  by  the  purchasing  syndicate,  and  as  the  sale  pro- 
gresses the  allotments  of  securities  are  called  back  by  the 
manager,  who  returns  the  amount  advanced  by  the  pur- 
chasing s.yndicate.  Should  the  term  of  syndicate  holding 
expire  before  a  market  is  found  for  all  of  the  securities, 
the  underwriters  are  left  with  the  balance  upon  their  hands, 
of  which  they  may  dispose. 

The  syndicate  managers  will  arrange  a  loan  from  some 
bank  or  trust  company  for  such  sum  or  sums  of  money 
as  may  be  needed  to  control  the  properties  or  make 
advances  for  construction  and  operation  during  the  period 
covered  by  the  underwriting,  the  issues  underwritten  be- 
ing used  as  collateral  for  the  loan.  As  sales  of  securities  are 
made,  or  when  the  underwriting  expires  and  the  syndicate 
subscribers  take  over  the  unsold  balance  of  securities,  the 
syndicate  loan  will  be  paid  and  the  securities  held  as  col- 
lateral released.  The  transaction  may  be  carried  through 
on  practically  the  same  lines  before  the  corporation  issues 
the  securities  by  means  of  participation  certificates.  If  the 
underwriting  results  as  favorably  as  is  expected  no  capital 

26 


PROMOTION  AND  UNDERWRITING 

is  required,  and  the  arrangement  is  simply  the  establish- 
ment of  a  friendly  relation  with  a  bank  which  permits  the 
borrowing  of  large  sums  of  money  on  favorable  terms. 

Individual  Withdrawals. — Sometimes  the  members  of  a 
syndicate  are  permitted  to  withdraw  for  their  own  use 
securities  to  the  amount  for  which  they  are  responsible, 
thereby  relinquishing  their  share  of  the  profits  upon  the 
underwriting  but  obtaining  investment  securities  at  a  lower 
price  than  would  otherwise  be  possible.  During  the  sale, 
however,  every  effort  is  made  to  keep  the  issue  off  the 
"street,"  and  to  this  end  syndicate  managers  usually  re- 
sei-ve  the  right  to  buy  back  for  the  syndicate  any  securi- 
ties which  may  come  into  the  market  up  to  a  certain  limit. 
This  is  done  to  prevent  a  break  in  prices  on  account  of 
reselling  by  those  who,  either  because  of  impatience  over 
delay  in  waiting  for  a  favorable  market,  financial  neces- 
sity, or  altered  opinion  as  to  the  investment  value  of  the  new 
securities,  may  throw  over  their  holdings  to  prevent  indi- 
vidual loss.  After  the  expiration  of  the  agreement  to  hold, 
reselling  affords  a  test  of  the  standing  of  the  securities  upon 
the  market. 

Sales  of  Underwritten  Securities. — Underwritten  securi- 
ties may  be  offered  directly  for  public  subscription,  or  they 
may  be  disposed  of  at  private  sale.  In  most  cases  both 
methods  are  employed.  A  public  offering  is  advertised  sev- 
eral weeks  in  advance,  and  bids  are  invited  subject  to  the 
provision  that  the  manager  may  reject  any  or  all  applica- 
tions or  allot  a  smaller  amount  than  is  bid  for.  In  the  Penn- 
sylvania first  mortgage  bond  issue  of  1908,  the  securities 
were  oversubscribed  many  times,  and  applicants  for  small 
allotments  got  nothing,  while  large  bidders  received  only  a 
small  portion  of  the  amounts  which  they  sought.  In  the 
case  of  such  an  amply  secured  issue  of  bonds  by  a  well 
known  corporation  like  the  Pennsylvania,  this  method  is 
often  the  most  satisfactory,  but  few  railroads  have  the  un- 

27 


RAILROAD  FINANCE 

encumbered  property  to  furnish  such  an  attractive  security, 
and  still  fewer  possess  tlie  general  credit  that  is  enjoyed 
by  this  company.  To  dispose  of  many  issues,  therefore,  it 
is  necessary  to  enlist  the  services  of  traveling  salesmen,  who 
seek  to  place  the  securities  with  the  particular  classes  of 
investors  to  which  they  are  best  adapted.  Thus  one  variety 
of  bonds  will  be  of  the  sort  which  is  suitable  for  estates  and 
trust  funds ;  others  will  be  adapted  to  the  needs  of  national 
banks;  still  others,  to  savings  institutions.  Certain  states 
allow  domestic  corporations  to  assure  the  tax  upon  their 
securities,  thus  exempting  those  in  the  hands  of  investors; 
the  salesmen  will  endeavor  to  place  the  securities  thus 
favored  among  investors  and  institutions  which  may  profit 
from  the  exemption.  Usually  non-participating  bankers 
are  allowed  a  commission  of  about  one-fourth  of  one  per 
cent,  upon  all  securities  which  they  dispose  of,  as  are  the 
members  of  the  syndicate  when  acting  as  selling  agents. 
When  two  or  more  houses  work  together  as  managers,  one 
may  remain  inactive,  or  there  may  be  a  division  of  terri- 
tory. The  general  public  is  reached  through  the  medium 
of  advertisements  in  periodicals  and  circulars  setting  forth 
the  nature  of  the  securities  and  inviting  correspondence 
with  a  view  to  subscription. 

Possibilities  of  Loss. — For  their  services  as  syndicate 
managers,  the  banks  charge  a  commission  on  par  of  securi- 
ties purchased  by  the  syndicate.  Sometimes  this  charge  is 
split  so  that  one-half  is  figured  upon  the  purchase  and  one- 
half  upon  the  sale.  The  effect  of  this  arrangement  is  to 
allow  a  rebate  to  participants  upon  whatever  securities  re- 
main unsold.  Sj'ndicates  have  made  large  profits,  espe- 
cially in  the  late  nineties,  and  in  the  period  of  speculative 
activity  which  came  to  an  end  in  the  early  months  of  1907. 
At  that  time,  many  snydicates  were  dissolved  at  a  loss, 
and  the  participants  were  left  with  large  amounts  of 
securities  for  which  there  was  no  immediate  market.     This 

28 


PROMOTION  AND  UNDERWRITING 

emphasizes  the  element  of  risk,  and  shows  that  the  large 
syndicate  profits  which  are  made  in  periods  of  active  de- 
mand for  securities  may  be  considerably  reduced  by  opera- 
tions in  times  when  demand  is  suddenly  withdrawn  and 
the  underwriters  are  forced  to  sell  at  a  loss. 

Influence  of  the  Great  House. — Railroads  have  extended 
so  widely  over  the  country  that  there  is  now  greater  need 
for  the  improvement  and  extension  of  existing  lines  than 
for  the  undertaking  of  new  enterprises.  Control  of  rail- 
road systems,  moreover,  has  passed  into  the  hands  of  a  com- 
paratively few  capitalists,  whose  affiliated  banks  exert  their 
influence  to  discourage  new  projects  which  threaten  to  com- 
pete either  for  traffic  or  for  construction  funds.  So,  while 
projects  for  the  building,  by  independent  interests,  of  small 
roads  are  still  frequently  laid  before  the  banking  houses  of 
the  country,  few  bankers  care  to  risk  antagonizing  the  great 
financial  powers  from  whom  they  may  some  day  need  to 
ask  for  accommodation. 

Conspicuous  Independent  Operations. — In  a  few  in- 
stances railroad  promoters,  whether  from  necessity  or 
choice,  have  been  able  to  finance  their  enterprises  without 
the  aid  of  Wall  Street,  but  such  cases  are  so  rare  as  to  be 
conspicuous.  When,  a  generation  ago,  James  J.  Hill  ap- 
pealed to  New  York  capitalists  for  funds  with  which  to 
build  a  new  transcontinental  railroad  through  the  North- 
west, his  proposition  was  dismissed  with  abruptness,  and 
with  some  ridicule.  He  thereupon  obtained  capital  in 
Amsterdam,  and  soon  formed  a  connection  with  the  bank 
of  Montreal,  which  bought  control  from  the  Dutch  bankers. 
With  this  aid  he  was  able  to  build  the  Great  Northern  rail- 
way, and  to  establish  himself  in  a  dominant  position  in  the 
territory  served  by  that  line.  David  H.  Moffat,  the  Den- 
ver capitalist  who  projected  the  Denver,  Northwestern,  and 
Pacific  between  Denver  and  Salt  Lake,  was  unable  to  obtain 
New  York  capital  for  his  enterprise  in  face  of  the  opposi- 

29 


RAILROAD  FINANCE 

tion  of  the  Denver  and  Rio  Grande  and  Union  Pacific  in- 
terests, represented  by  Gould  and  Harriman.  He  went 
ahead,  however,  on  his  own  funds,  supplemented  by  the 
proceeds  of  a  small  amount  of  bonds  which  he  Avas  able  to 
sell  to  European  bankers.  In  1907  he  was  forced  to  call  in 
more  outside  aid,  but,  following  his  death,  receivers  took 
charge  of  the  road  and  also  of  the  holding  company,  the 
Denver  Railway  Securities  company.  Henry  H.  Rogers, 
from  motives  of  choice,  attempted  to  finance  his  Tidewater- 
Deepwater  (now  Virginian)  railway  enterprise  in  Virginia 
without  recourse  to  the  banks.  With  the  stringency  of  the 
money  market  in  1907,  he  was  embarrassed  to  the  extent 
that  he  found  it  necessary  to  organize  a  construction  com- 
pany, which  issued  short  term  notes  at  a  high  rate  of  in- 
terest. 

THE  NATURE  OF  THE  FINANCIAL  SUPPORT  OBTAINED 

In  General. — The  different  kinds  of  financial  support 
which  have  been  attracted  to  railroad  enterprises  are  of 
three  broad  classes:  subsidies,  funds  contributed  by  inves- 
tors, and  funds  contributed  by  speculators.  Subsidies 
have  been  granted  in  various  forms  by  individuals,  by  local 
and  state  governments,  and  by  the  national  government. 
Investors  in  railroad  securities  have  not  always  been  indi- 
viduals; during  the  early  period  many  a  local  and  state 
government  advanced  capital  not  alone  to  give  needed  sup- 
port to  a  much  needed  transportation  project  but  on  the 
theory  that  it  would  acquire  a  right  to  participate  directly 
in  the  profits  of  a  lucrative  business  when  the  railroad 
should  be  constructed  and  in  operation.  Generally  speak- 
ing, investors  are  of  two  classes:  those  who  have  put  their 
money  into  local  projects  with  which  they  are  personally 
familiar,  and  those  who  have  taken  shares  or  bonds  repre- 
senting properties  which  have  been  investigated  or  are 
represented  by  financial  agencie.s.  Speculation  has  con-' 
tributed  a  large  share.     The  capital  which  has  found  its 

30 


PROMOTION  AND  UNDERWRITING 

way  into  the  market  through  speculative  channels  has  not 
come  from  any  particular  class  of  individuals.  There  have 
always  been  professionals  who  have  purchased  securities 
with  the  idea  of  unloading  on  a  rising  market,  and  there 
have  always  been  victims  of  the  exaggerated  representa- 
tions of  promoters. 

Individual  Subsidies. — Individual  subsidies  have  been 
given  in  the  form  of  subscriptions  to  cover  the  expense  of 
surveys,  releases  of  rights  of  way,  and  donations  of  land, 
stone,  gravel,  timber,  and  other  materials.  Many  indi- 
vidual subscriptions  were  nothing  but  subsidies.  Such 
were  the  subscriptions  made  in  response  to  appeals  upon 
the  basis  of  public  benefit  rather  than  private  profit;  such 
also  were  the  subscriptions  of  merchants  whose  desire  was 
for  larger  and  more  active  business,  and  the  subscriptions 
of  farmers  who  were  attracted  by  the  prospect  of  higher 
prices  for  their  products  and  easier  access  to  market. 
These  subscriptions  were  paid  not  only  in  money  but  also 
in  land,  labor,  and  materials,  and  by  notes  secured  by  farm 
mortgages. 

Local  Subsidies. — Local  subsidies  have  been  granted  in 
all  sections  of  the  country  to  an  extent  which  is  practically 
impossible  of  determination.  All  communities  wished  to 
share  in  the  business  prosperity  which  followed  the  open- 
ing of  new  railroad  connections,  and  cities  and  towns 
needed  little  urging  upon  the  part  of  promoters  to  induce 
them  to  become  financially  interested  in  their  projects. 
They  have  endorsed  the  bonds  of  railroad  companies,  and 
exchanged  their  bonds  for  bonds  of  railroad  companies  and 
for  railroad  shares.  Local  subsidies  have  also  been  given 
in  the  form  of  donations  of  money,  bonds,  and  lands. 
Throughout  the  West  it  was  once  the  common  practice  to 
donate  land  for  station  sites  and  yards. 

State  Subsidies. — States,  also,  have  given  generous  sup- 
port to  railroads.     Maryland  was  heavily  interested  in  the 

31 


RAILROAD  FINANCE 

Baltimore  and  Ohio,  New  York  in  the  New  York  and  Erie, 
and  Massachusetts  in  the  Western  railroad.  Virginia  early 
adopted  the  policy  of  taking  three-fifths  of  the  share  capi- 
tal of  all  railroads  within  its  borders,  and  Louisiana  simi- 
larly subscribed  to  the  extent  of  one-fifth.  For  a  short 
time  Ohio  subscribed  to  one  share  for  every  other  subscrip- 
tion for  twice  that  amount  to  the  share  capital  of  railroads 
within  the  state.  Few  Northern  states,  however,  gave  aid 
in  the  form  of  share  subscriptions.  The  loan  of  credit  was 
the  most  widely  used  form  of  state  subsidy  in  all  parts  of 
the  country.  Massachusetts  authorized  loans  to  the  amount 
of  over  $11,000,000  to  eight  railroads;  New  York,  of  over 
$8,000,000  to  nine  railroads.  During  the  reconstruction 
period  in  the  South,  legislatures  voted  away  the  credit  of 
their  states  to  an  extent  which  ultimately  gave  but  little 
range  for  choice  between  repudiation  and  insolvency. 
States  have  also  guaranteed  city  bonds  issued  in  aid  of  rail- 
roads; they  have  advanced  loans  out  of  special  funds  and 
out  of  the  general  treasury.  Some  of  these  loans  bore  no 
interest.  Other  forms  of  state  aid  were :  direct  appropria- 
tions to  pay  the  expense  of  surveys,  interest  payments  on 
railroad  bonds,  surrendered  claims,  and  grants  of  land. 
Texas,  which  retained  its  public  lands  upon  annexation  to 
the  United  States,  granted  over  32,000,000  acres  to  rail- 
roads and  internal  improvements,  chiefly  railroads.  Most 
of  the  state  constitutions  now  forbid  any  loan  of  state* 
credit,  and  many  of  them  forbid  state  subscriptions  to  the 
shares  of  corporations.  Over  half,  also,  forbid  local  aid 
of  any  sort. 

National  Subsidies. — National  aid  to  railroads  began  with 
a  provision  in  the  tariff  of  1830  for  a  drawback  upon  duties 
paid  upon  imported  railroad  iron;  and  from  1832  to  1842 
complete  exemption  was  allowed  upon  rails.  In  this  way 
the  railroads  had  profited  to  the  extent  of  nearly  $6,000,000 
by  1843  when  the  system  was   abolished.     Beginning  in 

32 


PROMOTION  AND  UNDERWRITING 

1835  congress  granted  to  certain  railroads  rights  of  way 
through  the  public  lands,  and  in  1853  the  privilege  was 
made  general.  In  1850  congress  granted  lands  to  Illinois, 
Alabama,  and  Mississippi,  to  encourage  the  construction  of 
a  line  of  railroad  from  Mobile  to  Cairo  and  from  Cairo  to 
Chicago  and  Galena.  The  Mobile  and  Ohio  and  the  Illi- 
nois Central  were  the  final  recipients  of  this  bounty.  With 
the  act  of  1850  began  the  system  of  congressional  land 
grants  to  railroads  through  the  medium  of  the  states  as 
trustees  or  agents  of  the  transfer.  As  the  railroads  ex- 
tended out  into  the  territories,  they  received  grants  of  land 
directly  from  congress.  Altogether  there  were  seventy-nine 
land  grant  railroads,  and  the  lands  within  the  limits  of 
the  original  grants  amounted  to  nearly  200,000,000  acres. 
This  total  has  been  reduced  by  forfeitures  to  less  than  160,- 
000,000  acres,  title  to  nearly  110,000,000  acres  of  which  has 
been  established.  The  Northern  Pacific  alone  received  an 
acreage  of  about  44,000,000;  an  amount  equal  to  the  com- 
bined grants  of  the  Union  Pacific,  Central  Pacific,  and 
Southern  Pacific.  The  Atchison  system  received  17,000,000 
acres;  the  Illinois  Central,  over  2,500,000  acres;  and  the 
Mobile  and  Ohio,  over  1,000,000  acres. 

Loans  of  Credit. — Congress  also  granted  direct  financial 
aid  by  loaning  $64,623,512  to  six  railroads  to  encour- 
age the  construction  of  a  through  line  to  the  Pacific.  The 
Pacific  railroad  acts  of  1862  and  1864,  besides  granting 
large  tracts  of  lands  from  the  public  domain,  provided  that 
thirty-year  United  States  bonds  be  delivered  as  sections  of 
the  line  should  be  completed.  These  bonds  were  secured 
by  mortgage  upon  the  railroad  property.  In  accordance 
with  these  laws,  $27,236,512  was  received  by  the  Union  Pa- 
cific, $25,885,120  by  the  Central  Pacific,  $6,303,000  by  the 
Kansas  Pacific,  $1,970,560  by  the  Western  Pacific,  $1,628,- 
320  by  the  Sioux  City  and  Pacific,  and  $1,600,000  by  the 
Central  Branch  Union  Pacific. 
4  33 


CHAPTER  III 

CAPITALIZATION:    ORIGINAL   ^VND   SUPPLEMENTARY 

Need  for  Exact  Definition  of  "Capital." — If  one  should 
ask  a  merchant,  a  manufacturer,  or  a  banker  how  much  capi- 
tal he  had  when  he  began  business,  there  would  be  no  un- 
certainty as  to  what  was  meant  by  the  question.  Nor 
would  there  be  any  difficulty  in  understanding  what  was 
meant  if  one  were  to  inquire  as  to  the  amount  of  capital 
now  invested  in  the  business.  But  when  we  come  to  con- 
sider the  subject  of  corporate  capitalization,  we  are  eon- 
fronted  immediately  with  a  confusion  of  terms;  every  one 
who  undertakes  to  contribute  to  the  discussion  gives  to  the 
word  "capital"  such  meaning  as  may  best  serve  his  pur- 
pose. An  attempt  was  recently  made  to  ascertain  what 
ideas  of  capital  were  entertained  by  the  students  in  a  course 
on  corporation  finance  in  a  well  knouTi  graduate  school  of 
business  administration.  With  a  balance  sheet  of  about 
thirty  items  before  them,  one  member  or  another  of  the 
class  identified  as  capital  items,  the  entire  list  of  assets  and 
liabilities  with  the  exception  of  "short  term  notes."  This, 
no  one  could  reconcile  with  his  notion  of  capital.  The 
result  of  the  test  is  noteworthy  as  showing  a  general  lack  of 
definiteness  of  concept  among  economists  and  among  stu- 
dents who  have  received  their  instruction  from  economists. 
So  long  as  there  is  so  much  confusion  in  matters  of  defini- 
tion, there  can  be  little  exact  thinking  about  the  subject. 

Confusion  of  Ideas. — A  concrete  illustration  of  the  utter 
disregard  for  any  well  defined  concept  of  capital  may  be 
found  in  almost  any  railroad  balance  sheet.  If  the  ques- 
tion were  asked  as  to  what  items  represent  the  capital  of 
the  corporation,  it  would  be  impossible  to  answer  from 

34 


CAPITALIZATION 

the  evidence  available.  It  is  probable  that  most  persons 
would  look  to  the  liability  side  of  the  account,  and  spe- 
cifically to  the  item  "capital  stock;"  some  might  add 
the  ''funded  debt";  others  might  go  still  further  and 
include  the  surplus.  A  few  would  probably  confine  their 
attention  to  the  assets  side  of  the  account,  and  attempt  to 
determine  what  specific  resources  represent  the  capital 
investment.  These  several  points  of  view  would  necessarily 
create  nothing  but  confusion  in  any  general  discussion 
as  to  what  was  the  original  or  present  capitalization ; 
whether  the  concern  is  adequately  capitalized  or  over- 
capitalized; whether  the  invested  capital  is  amply  pro- 
tected ;  whether  dividends  have  been  declared  out  of  capital ; 
whether  dividends  represent  fair  return  to  the  sharehold- 
ers; or  as  to  any  other  question  relating  to  the  cap- 
ital of  the  corporation.  Many  of  these  assumptions 
do  violence  to  any  well  considered  view  of  tlie  pur- 
pose and  function  of  capital.  To  conceive  of  capital  as  a 
liability  does  not  admit  of  the  consideration  of  many  of 
the  commonest  capital  relations — it  affords  no  basis  for 
either  investment  or  administrative  judgment.  Yet  this 
is  no  reason  whj^  information  about  capital  may  not  be 
found  on  the  liability  side  as  well  as  the  asset  side  of  the 
balance  sheet. 

A  Definition  Suhmitied. — To  be  consistent  and  logical  in 
the  assembling  and  classification  of  the  data  and  experience 
of  business,  it  is  submitted  that  capital  must  be  considered 
as  a  resource;  that  the  capital  of  a  railroad  or  other  cor- 
poration must  be  considered  as  included  in  the  general 
category  of  "assets."  Using  the  terms  in  the  sense  com- 
monly accepted  by  persons  whose  business  is  not  incorpo- 
rated and  by  the  courts  in  the  interpretation  of  the  law  of 
corporations,  it  would  be  confined  to  those  assets  of  the  cor- 
poration which  have  been  provided  and  which  are  intended 
for  continuing,  productive  use.     This  is  the  sense  in  which 

35 


RAILROAD  FINANCE 

it  is  used  throughout  this  work,  whether  the  discussion  re- 
lates to  original  acquisition  of  capital  or  to  management  of 
capital.  But  for  the  purpose  of  obtaining  and  represent- 
ing facts  about  capital  it  is  assumed  that  liability  accounts 
as  well  as  asset  accounts  may  be  used:  asset  accounts  to 
tell  the  storj'  of  the  results  of  capital  expenditure  and  per- 
taining to  the  result  of  administration  of  properties; 
liability  accounts  to  tell  the  story  of  the  methods  of  financ- 
ing and  of  the  issue  and  retirement  of  obligations  en- 
tered into  to  obtain  capital. 

Capital  as  an  Instrument  of  a  Going  Concern. — Accept- 
ing the  definition  that  capital  is  the  assets  of  the  corpora- 
tion which  have  been  contributed  for  continuing  use,  a  num- 
ber of  questions  are  constantly  before  those  interested  per- 
taining to  these  assets.  AVhat  amount  has  been  con- 
tributed for  capital  use?  What  properties  have  been 
acquired  and  w'hat  are  now  possessed  which  may  serve 
the  continuing  uses  of  the  company  as  a  going  concern? 
AVTiat  is  the  relation  of  such  properties  to  the  amount  of 
capital  contributed?  What  is  the  difference  to  be  ac- 
counted for? 

If  we  are  to  know  what  properties  the  company  owns 
that  may  be  continuously  used,  we  must  eliminate  from 
the  list  of  assets,  all  things  acquired  or  possessed  which  are 
intended  for  consumption,  and  all  which  in  the  regular 
course  of  business  are  intended  for  conversion  or  sale 
at  a  profit.  But  cash  in  hand  obtained  from  the  sale  of 
shares  or  credit  obligations  must  be  considered  as  capital; 
also  the  property  purchased  with  those  funds.  A  working 
fund,  whether  provided  by  shareholders  or  set  aside  by  the 
board  of  directors  out  of  the  proceeds  of  sales  of  shares  or 
of  bonds,  is  capital.  Any  application  of  money  funds  or 
credit  funds  to  the  acquisition  of  resources  intended 
for  continuous,  productive  use  is  an  act  of  capitalization 
and  an  appropriation  of  funds  to  capital  purposes.     The 

36 


CAPITALIZATION 

fact  that  bad  judgment  may  have  been  used  in  the  choice 
of  investments  in  capitalization  is  an  essential  element  in 
the  consideration  of  financial  management,  but  it  cannot 
alter  the  nature  of  assets. 

Accepting  as  a  criterion  the  economic  and  institutional 
purpose  of  assets  acquired  or  in  possession,  it  follows  that 
any  classification  of  resources  which  distinguishes  capital 
assets  from  assets  which  are  not  intended  for  capital  use 
must  relate  to  a  going  concern.  Strictly  speaking,  a 
corporation  which  is  about  to  close  up  its  affairs,  or  to  be- 
come permanently  non-operative  would  not  be  considered 
as  having  a  capital.  It  may  have  properties,  and  it  may 
have  obligations  which  were  incurred  in  the  acquisition  of 
capital ;  but  in  any  statement  of  financial  condition  of  such 
a  defunct  or  moribund  institution,  there  would  be  no  need 
to  distinguish  between  those  properties  which  were 
acquired  for  capital  use  and  those  which  were  not.  The 
purpose  of  such  a  statement  would  be  to  show  the  realiza- 
tion value  of  all  the  property,  and  the  amount  of  the  claims 
against  it,  and  to  enable  the  shareholders  to  determine 
whether  the  balance  available  for  final  distribution  would 
be  sufficient  to  represent  their  original  investment. 

Classification  and  Valuation  of  Capital  Assets. — It  may 
be  assumed  that  the  only  purpose  of  classification  of  assets 
is  to  enable  investors  and  the  management  to  think  intelli- 
gently about  the  business  of  the  corporation  and  about  its 
financial  condition  as  a  going  concern.  The  object  of  capi- 
talization being  to  obtain  resources  needed  for  productive 
use,  it  is  desirable  to  have  these  resources  stated  in  their 
productive  relation;  to  show  what  obligations  have  been 
incurred  for  capital  and  what  in  due  course  of  current 
business.  This  will  enable  the  manager  and  the  investor 
to  ascertain  how  the  capital  funds  have  been  invested,  and 
whether  the  investment  has  been  impaired.  The  business 
purpose  of  acquiring  assets  other  than  capital  being  one 

37 


008  7 


RAILROAD  FINANCE 

of  realization  or  conversion  into  cash,  it  is  desirable  to  have 
these  resources  stated  at  their  cash  and  estimated  realiza- 
tion value,  and  to  state  them  so  that  the  net  results  of 
operation  may  be  ascertained  at  a  glance.  In  estimating 
the  value  of  capital  assets,  the  purpose  is  to  determine  the 
amount  of  the  investment  represented.  The  proper  basis 
for  the  valuation  of  the  things  to  be  continuously  used  for 
productive  purposes  would  be  original  cost  with  adequate 
allowance  for  depreciation;  otherwise,  there  can  be  no 
means  of  determining  whether  the  capital  has  been  wisely 
invested  and  adequately  protected.  As  to  all  assets  other 
than  capital  resources,  it  would  seem  that  they  should  be 
appraised  at  their  realization  value. 

Classification  of  Capital  Liabilities. — Capital  liabilities 
are  those  incurred  in  obtaining  capital  funds  and  property. 
Good  judgment  might  suggest  that  the  corporation 
should  not  enter  into  credit  contracts  for  funds  or 
properties  to  be  continuously  used  for  productive  purposes, 
as  under  such  an  arrangement  embarrassing  demands  for 
payment  may  be  made.  Nevertheless,  failure  or  refusal 
to  regard  such  obligations  as  capital  liabilities  will  not  aid 
the  investor  or  the  management  in  determining  the  real 
financial  condition.  For  this  reason  the  capital  obligations 
or  liabilities  of  a  corporation  are  to  be  considered  under 
four  general  heads:  (1)  capital  shares;  (2)  credit  obliga- 
tions; (3)  lease  contracts;  and  (4)  surplus  appropriated 
for  capital  use. 

Practical  Considerations  in  Original  Capitalization. — 
Among  the  important  considerations  in  original  capitali- 
zation, two  pertain  to  capital  assets  and  two  to  capital  lia- 
bilities. Those  pertaining  to  capital  assets  are  (1)  the 
character  of  capital  resources  which  will  be  needed ;  and 
(2)  the  amount  of  funds  which  will  be  required  to  obtain 
those  resources.  Those  pertaining  to  capital  liabilities  are 
(1)  the  future  advantage  or  disadvantage  to  the  corpora- 

38 


CAPITALIZATION 

tion  of  incurring  or  "issuing"  one  or  another  kind  of  con- 
tract or  obligation  in  procuring  the  funds  or  other  capital 
resources  required,  assuming  that  a  favorable  investment 
market  may  be  found;  and  (2)  the  present  ability  of  the 
corporation  to  sell  or  exchange  one  or  another  class  of  ob- 
ligations— shares,  bonds,  debentures,  short  term  notes,  etc. 
In  determining  the  character  of  issues  or  obligations  en- 
tered into  in  obtaining  capital,  considerations  as  to  the 
future  advantage  to  the  corporation  have  usually  been  sub- 
ordinated to  the  interests  of  promoters.  The  condition  of 
the  market  or  the  immediate  possibility  of  acquiring  funds 
and  properties  and  the  margin  of  profit  available  to  pro- 
moters have  been  the  factors  which  have  only  too  frequently 
determined  whether  one  or  another  class  of  securities 
should  be  issued. 

The  Corporation's  Interest  in  the  Choice  of  Capital 
Issues. — The  form  of  contract  or  obligation  incurred  for 
capital  which  is  best  suited  to  the  interests  of  the  corpora- 
tion is  the  capital  share.  A  certificate  to  a  shareholder  is 
an  evidence  of  proprietary  right  to  participate  in  the  bene- 
fits of  the  trust  estate,  the  legal  title  to  which  is  held  by  the 
corporation.  There  is  no  obligation  upon  the  part  of  the 
corporation  to  pay  any  amount  at  any  time.  There  ls  no 
contract  for  the  return  of  capital  contributed  so  long  as  it 
is  needed  by  the  corporation,  and  no  obligation  even  to  pay 
dividends  except  as  they  may  be  declared  by  the  board  of 
directors.  The  directors  could  not  return  the  capital  ex- 
cept after  formal  notice  and  by  following  legally  prescribed 
procedure  for  the  reduction  of  capital ;  they  may  not  de- 
clare dividends  except  out  of  unappropriated  surplus. 

Advantage  of  Issue  of  Shares. — The  advantage  to  the  cor- 
poration of  this  kind  of  contract  is  at  once  apparent.  The 
period  during  which  capital  will  be  needed  is  the  life  of 
the  corporation ;  the  obligation  to  the  shareholder  to  return 
his  capital  does  not  mature  until  the  affairs  of  the  corpora- 

39 


RAILROAD  FINANCE 

tion  are  wound  up.  The  ability  of  the  corporation  to  serve 
the  public  depends  upon  the  adequacy  and  uninterrupted 
use  of  its  capital — whether  this  be  in  the  form  of  property, 
equipment,  or  working  funds.  The  right  of  the  share- 
holder to  distribution  of  surplus  is  conditioned  upon 
the  judgment  of  the  directors  as  to  the  capital  needs  of  the 
corporation.  The  immediate  cause  of  financial  difficulties 
of  any  corporation  is  inability  to  meet  contracts  to  pay 
money  when  due ;  the  contract  to  pay  the  shareholder  never 
becomes  due  except  by  act  of  the  directors  of  the  corpora- 
tion itself,  and  even  the  directors  may  be  restrained  if  it 
appears  that  such  act  will  lead  to  financial  embarrassment. 

Preferred  Eights  and  Privileges  to  Shareholders. — As  a 
means  of  facilitating  the  obtaining  of  capital,  preferred 
rights  or  privileges  may  be  given  to  shareholders.  In  the 
case  of  initial  capitalization,  preferences  may  be  given  (1) 
when  the  promoter  arranges  to  take  his  profits  in  obli- 
gations of  the  corporation;  and  (2)  when  construction  or 
equipment  is  begun  upon  insufficient  capital.  The  promo- 
ter may  arrange  to  have  his  interest  represented  in  common 
shares,  giving  precedence  ^o  those  who  contribute  addi- 
tional capital ;  the  original  shareholders,  being  unable  or 
unwilling  to  furnish  the  full  amount  of  capital  necessary 
to  complete  the  work  of  construction  and  equipment,  may 
offer  special  inducements  to  others.  Although  there  is  no 
limit  to  the  variety  of  preferments  which  may  be  offered, 
there  may  be  said  to  be  three  general  classes,  (1)  prefer- 
ment as  to  dividend;  (2)  preferment  as  to  return  of  cap- 
ital upon  dissolution;  and  (3)  preferment  as  to  voting 
at  shaieholders'  meetings.  To  anj^  or  all  of  these  classes 
of  shares  there  may  be  granted  in  addition,  certain 
privileges  as  to  the  conversion  of  shares  into  bonds, 
or  as  to  the  subscription  to  additional  issues  of  shares  or 
convertible  bonds  at  lower  prices  than  are  available  to 
(Hi'fsidrrs.     But  notwitlistanding  all  the  preferment  which 

40 


CAPITALIZATION 

may  be  enjoyed  by  the  shareholders,  the  share  as  a  form 
of  capital  liability  is  more  desirable  from  the  standpoint 
of  the  future  welfare  of  the  corporation  than  any  other 
form  of  capital  obligation  which  may  be  issued.  It  may 
not  be  most  favorable  to  the  immediate  profit  of  the  pro- 
moter ;  it  may  not  be  most  favorable  to  the  interest  of  the 
shareholders  themselves;  but  there  can  be  no  question  as 
to  its  advantage  to  the  corporation. 

Obligations  to  Creditors. — The  obligations  and  the  pre- 
ferments enjoyed  by  bondholders  and  other  creditors  are 
of  a  quite  different  nature.  There  is  a  fundamental  dis- 
tinction between  contracts  with  creditors  and  those 
with  shareholders.  Credit  issues  are  in  the  nature  of  con- 
ditional contracts  for  the  future  payment  of  money. 
These  contracts  or  rights  to  future  payment  are  sold  by 
the  corporation  through  its  agents.  The  disadvantage  to 
the  corporation  of  this  method  of  financing  capital  re- 
quirements lies  in  the  right  of  the  creditor  to  require  that 
there  shall  be  available  a  sufficient  amount  of  money  to 
meet  each  credit  obligation  when  due  even  at  the  sacrifice 
of  all  the  assets  of  the  corporation.  This  method  having 
been  once  adopted,  however,  a  certain  element  of  protec- 
tion is  to  be  found  in  the  length  of  time  agreed  upon  be- 
fore the  funds  contributed  must  be  returned  and  in  the 
conditions  attached  to  the  current  payment  of  interest. 

Long  and  Short  Term  Credit  Obligations. — Credit  lia- 
bilities for  ten,  twenty,  or  fifty-year  terms  sold  or  ex- 
changed for  capital  funds  or  properties,  while  terminable 
and  requiring  delivery  of  the  promised  amounts  when  due, 
give  the  directors  ample  time  to  arrange  for  refunding — 
the  only  immediate  demands  being  for  interest  payments. 
Default  upon  this  part  of  the  obligation  usually  causes  the 
principal  also  to  fall  due  and  threatens  the  stability  of 
the  whole  enterprise.  Large  amounts  of  capital  have  been 
acquired  through  the  issue  of  short  term  notes  and  even 

41 


RAILROAD  FINANCE 

demand  notes.  This  is  a  method  involving  grave  danger, 
however,  even  after  a  corporation  has  acquired  its  physical 
plant.  The  danger  is  still  greater  in  the  case  of  a  cor- 
poration seeking  to  provide  for  original  capital  needs. 

Contracts  with  Lessors. — Under  a  lease  contract  one  cor- 
poration may  obtain  the  right  to  use  the  property  of  an- 
other and  to  surrender  it  at  the  end  of  a  specified  period. 
The  lease  may  require  no  payment  of  money  except  cur- 
rent rentals,  or  it  may  require  the  prepayment  of  rentals 
for  a  term  of  years.  In  the  first  case  no  initial  capital 
funds  are  required;  in  the  second  a  large  amount  of  capi- 
tal may  be  required,  but  such  prepayment  is  in  the  nature 
of  an  advance  out  of  capital  which  reduces  instead  of  in- 
creases the  future  need  for  funds  with  which  to  meet  cur- 
rent expenses.  In  any  event,  when  capital  is  borrowed 
or  leased,  a  smaller  amount  of  capital  funds  is  required 
than  would  have  been  needed  to  purchase  the  property 
outright.  Aside  from  the  element  of  protection  against 
insolvency,  the  future  advantage  to  the  lessee  corporation 
is  to  be  measured  in  terms  of  the  relation  of  the  current 
rental  charge  to  the  charge  which  would  have  been  made 
for  interest  if  the  corporation  had  obtained  adequate 
funds  for  the  purchase  of  the  property  outright.  A  fur- 
ther advantage  may  accrue  from  the  right  to  use  proper- 
ties and  operate  or  share  in  the  benefit  of  use  of  the  same 
under  a  franchise  which  gives  a  right  or  facility  which 
might  not  be  enjoyed  otherwise,  as  in  the  case  of  the  rental 
by  a  railroad  corporation  of  terminal  facilities  which  could 
not  be  purchased. 

Appropriations  Out  of  Surplus  for  Capital  Use. — Ap- 
propriations to  capital  out  of  surplus  may  be  made  ordi- 
narily only  by  an  established  concern.  The  only  circum- 
stance in  which  this  method  may  be  employed  in  original 
capitalization  is  when  a  surplus  has  been  created  by  con- 
tributions of  shareholders — something  almost  unheard  of 

42 


CAPITALIZATION 

in  railroad  finance.  But  according  to  our  definition  of 
capital,  there  can  be  only  an  apparent  surplus  in  such  a 
case.  It  is  only  by  reason  of  the  practice  of  stating  the 
share  liability  at  par  value  that  an  amount  contributed  in 
excess  of  the  aggregate  of  par  value  of  shares  issued  is 
carried  to  surplus  account.  "When  the  original  contribu- 
tion of  shareholders  is  inadequate  and  additional  shares 
are  issued  at  a  premium,  the  amount  of  the  premium  may 
be  appropriated  to  such  use,  or  it  may  be  set  aside  as  a 
reserve  for  amortization  or  as  a  sinking  fund.  Any  such 
appropriation  would  be  a  capital  use  and  one  to  the  fu- 
ture advantage  of  the  corporation,  as  it  can  carry  with  it 
no  obligation  for  repayment  and  may  serve  to  reduce  other 
obligations  which  might  otherwise  financially  embarrass 
the  corporation. 

The  Market  for  Original  Shares. — The  market  for  the 
shares  issued  by  a  new  railroad  corporation  has  usually 
been  found  in  the  communities  desirous  of  obtaining  bet- 
ter or  additional  transportation  facilities.  This  was  the 
case  particularly  in  New  England,  where  many  of  the 
early  railroads  were  able  to  dispose  of  sufficient  shares  in 
their  own  territory  to  provide  for  original  capital  needs 
without  resorting  to  the  issue  of  bonds.  When  the  con- 
tributions of  private  capital  were  found  inadequate,  they 
were  often  supplemented  by  subscriptions  to  shares  by 
state  or  local  governments.  In  some  instances  it  has  been 
possible  to  dispose  of  subscription  shares  in  the  financial 
markets;  but,  generally  speaking,  the  market  for  shares 
issued  as  a  means  of  providing  initial  capitalization  is 
either  local  or  personal.  Such  a  market  is  best  approached 
through  appeal  to  other  interests  than  those  of  investment. 
Therefore,  while  the  share  is  the  form  of  capital  obliga- 
tion most  favorable  to  the  interests  of  the  corporation,  it 
is  the  most  difficult  to  issue  in  sufficient  amounts  to  pro- 
vide fully  for  capital  needs.     It  was  in  recognition  of  this 

43 


RAILROAD  FINANCE 

fact  that  government  subsidies  in  the  form  of  subscrip- 
tions to  shares  were  sought  and  obtained,  particularly  in 
those  parts  of  the  country  where  the  local  supply  of  capi- 
tal was  small. 

The  Market  for  Bonds. — An  issue  of  bonds  is  primarily 
an  appeal  to  the  investor.  There  is  practically  no  limit 
to  the  amount  of  capital  which  may  be  obtained  in  this 
manner  if  the  bond  itself  be  made  sufficiently  attractive. 
The  bond  must  appeal  to  the  investor  solely  as  an  invest- 
ment, and  not  as  a  means  of  benefiting  any  local  interests; 
its  security  as  to  both  interest  and  principal  must  be  am- 
ple; it  must  provide  for  a  rate  of  return  equal  to  other 
well  secured,  long  time  credit  contracts ;  and  it  must  make 
ample  provision  for  caring  for  the  mortgaged  property  as 
a  trust  in  ease  of  default.  In  other  words,  the  features  of 
the  contract  which  make  the  bond  most  attractive  to  in- 
vestors are  those  which  make  it  least  favorable  to  the  in- 
terest of  the  corporation  by  which  it  is  used  as  an  instru' 
ment  of  capitalization.  Assuming  a  partial  capitaliza- 
tion by  sales  of  shares  to  individuals  or  to  a  subsidizing 
government,  and  assuming  unencumbered  resources  suffi- 
cient to  give  adequate  security,  the  bond  is  the  most  mar- 
ketable of  all  contracts  which  may  be  offered.  At  times 
also,  the  issue  of  bonds  is  most  favorable  to  the  interest  of 
both  the  promoter  and  the  shareholders.  Having  arranged 
for  local  support  in  the  form  of  individual  subscriptions 
to  shares  and  government  subsidies,  and  having  ar- 
ranged with  the  new  corporation  for  the  transfer  of  sub- 
sidies, franchises,  and  rights  for  cash  or  securities,  it  may 
be  to  the  highest  advantage  of  the  promoter  to  have  the 
corporation  sell  as  many  bonds  as  possible,  even  at  a  rea- 
sonable discount.  And  the  shareholders,  also,  may  find  it 
to  their  advantage  to  have  the  corporation  borrow  at  a  low 
rate  of  interest,  and  so  leave  a  larger  margin  of  surplus 
which  may  be  distributed  in  the  form  of  dividends, 

44 


CAPITALIZATION 

Forms  in  Which  Capital  May  Be  Obtained. — The  usual 
form  in  which  capital  is  obtained  is  cash.  This  is  most 
desirable,  as  it  provides  funds  out  of  which  property  may 
be  purchased  and  payments  made  to  the  greatest  advan- 
tage. It  is  a  mistake,  however,  to  assume  that  this  is  the 
only  form  in  which  capital  is  obtained  directly  from  the 
shareholders  and  creditors.  A  corporation  may  be  organ- 
ized to  take  over  the  entire  capital  funds  and  properties 
of  one  or  several  corporations  or  individuals.  In  such 
case  the  capital  assets  will  be  already  in  the  form  needed 
for  carrying  on  the  business,  and  the  obligations  issuedl 
therefor  may  be  shares  or  bonds  or  both.  Similarly,  the 
corporation  may  arrange  with  contractors  to  exchange  its 
securities  for  construction  work  and  equipment.  It  may 
aLso  obtain  these  properties  in  exchange  for  short  term 
credit  obligations,  the  vendors  relying  upon  the  ability 
of  the  company  to  provdde  for  payment  out  of  the  pro- 
ceeds of  sales  of  securities  issued  as  sections  of  the  work 
are  completed  and  turned  over  for  operation.  Practically 
every  kind  of  property  and  service  which  might  be  util- 
ized by  railroads  for  productive  use  has  been  received 
in  exchange  for  capital  obligations. 

Inadequacy  of  Initial  Capitalization  of  American  Rail- 
roads.— One  of  the  most  significant  facts  in  the  financial 
history  of  American  railroads  is  that  in  most  instances 
their  original  capitalization  has  been  insufficient.  This 
has  been  due  chiefly  to  two  causes,  (1)  inability  to  fore- 
see the  rapid  increase  of  the  demand  for  transportation 
services  and  consequent  failure  to  provide  for  sufficient 
capital;  (2)  lack  of  available  investment  capital  in  locali- 
ties most  in  need  of  transportation  facilities.  The  result 
of  this  inadequacy  of  capitalization  has  been  to  interfere 
with  the  efficiency  of  management,  and  to  invite  insol- 
vency and  consequent  reorganization  upon  a  broader 
financial  basis.     Few  railroads  have  escaped  the  difficul- 

45 


RAILROAD  FINANCE 

tics  incident  to  capital  weakness,  and  the  fortunate  ones 
have  done  so  by  constantly  building  up  their  resources 
through  new  issues  of  securities,  favorable  leases,  and. 
appropriations  to  capital  out  of  surplus. 

Issue  of  Additional  Securities. — The  issue  of  new  capi- 
tal shares  is  a  matter  to  be  decided  by  vote  of  the  share- 
holders, but  in  many  states,  particularly  in  the  West, 
bonds  may  be  issued  without  the  consent  or  even  the 
knowledge  of  the  shareholders.  New  capital  is  issued  for 
the  building  of  extensions,  for  the  purchase  of  additional 
equipment,  for  betterments,  and  for  various  other  corpo- 
rate purposes.  Whenever  money  is  plentiful  and  rates  of 
interest  low,  a  railroad  will  usually  attempt  to  issue  long 
term  bonds.  Sometimes,  in  order  that  the  bonds  may  be 
more  attractive,  they  are  made  convertible  into  shares, 
thus  affording  their  holders  opportunity  to  share  to  the 
fullest  extent  in  the  profits  accruing  from  the  use  of  a 
larger  capital.  The  question  as  to  whether  bonds  or 
shares  shall  be  issued,  therefore,  is  one  which  can  be  de- 
cided only  with  reference  to  all  conditions  affecting  the 
financial  market. 

Privileged  Subscriptions. — When  a  railroad  decides  to 
increase  its  capital,  as  has  been  already  shown,  preference 
is  usually  given  to  the  shareholders  in  the  matter  of  sub- 
scribing for  the  new  shares  or  bonds.  Rights  to  privileged 
subscription  may  be  granted  whether  the  new  securities 
are  convertible  bonds  or  shares.  The  usual  custom  when 
the  shares  of  a  railroad  are  quoted  well  above  par,  is  to 
offer  each  shareholder  the  privilege  of  taking  his  propor- 
tion of  new  shares  at  par  or  at  a  price  considerably  below 
the  figure  at  which  the  old  shares  are  quoted  upon  the  mar- 
ket. If  any  of  the  shareholders  do  not  care  to  increase 
their  holdings,  they  may  sell  their  "rights."  Thus,  in 
either  event,  they  profit  from  the  new  issue.  The  sub- 
scriptions are  in  every  case  payable  in  installments,  and 
it   is   customary   to   pay   interest   upon   the   subscription 

46 


CAPITALIZATION 

money  until  the  whole  amount  is  assessed,  when  the  new 
shares  are  placed  in  the  dividend  account  upon  the  same 
footing  as  the  old.  Privileges,  by  affording  opportunity 
for  profit,  tend  to  create  a  ready  market  for  shares,  and  to 
retain  the  same  shareholders  in  the  corporation,  thereby 
insuring  stability  and  conservatism.^ 

The  privileged  subscription  is  not  new  in  railroad 
finance.  As  early  as  1840  the  New  York  and  New  Haven, 
having  failed  to  sell  enough  bonds  to  retire  its  floating 
debt,  offered  shareholders  the  privilege  of  subscribing  at 
less  than  market  price  to  their  proportion  of  4000  shares 
which  had  been  forfeited.  The  Boston  and  Lowell  in 
1870  offered  to  each  holder  of  three  shares  the  privilege 
of  taking  at  par  one  new  share.  Scores  of  recent  eases 
could  be  cited.  The  Northern  Pacific  in  1906  issued 
$93,000,000  of  new  shares,  allowing  shareholders  of 
record  to  take  at  par,  new  shares  to  the  amount  of  sixty 
per  cent,  of  their  holdings.  The  Chicago  and  North 
Western  in  1907  issued  $25,000,000  of  new  share  capital 
to  shareholders  at  par  to  the  extent  of  twenty-five  per 
cent,  of  their  holdings.  In  1907  the  Union  Pacific  offered 
$75,000,000  of  four  per  cent,  twenty-year  convertible 
bonds  "divisible  among  the  stockholders  at  the  rate  of 
one  bond  for  each  forty  shares  of  stock  ...  at 
ninety  per  cent,  of  their  par  value."  The  Atchison  the 
same  year  offered  to  shareholders  at  par,  $26,000,000  of 
ten-year  convertible  five  per  cent,  bonds  to  an  amount 
equal  to  twelve  per  cent,  of  their  holdings  of  shares;  and 
in  1909  this  company  offered  its  shareholders  the  privi- 
lege of  subscribing  at  104  to  an  amount  of  long-term  four 
per  cent,  convertible  bonds  equal  to  twelve  per  cent,  of 
their  holdings. 

Short   Term   Notes. — When   funds   cannot   be   obtained 

1  JJurgunder,  "The  Declaration  and  Yield  of  Stockholders'  Rights," 
Amer.  Acad,  of  Pol.  and  Soc.  Sci.,  Annals.  XXXV,  554-78;  Mitchell, 
"Stockholders'  Profitg  from  Privileged  Subscriptions,"  Quar.  Jour. 
»/  Econ.,  XIX,  230-69. 

47 


RAILROAD  FINANCE 

from  the  sale  of  new  shares  and  bonds,  the  only  alterna- 
tive is  to  borrow  money  in  the  open  market.  As  at  such 
times  interest  rates  are  excessive,  the  loans  are  made  for 
only  a  few  years;  hence  the  term  "short-term  notes." 
The  issue  of  short-term  notes  may  usually  be  taken  as 
evidence  of  the  fact  that  the  bankers  are  loaded  up  with 
securities  which  have  failed  to  attract  the  investing  pub- 
lie.  As  they  add  to  the  amount  of  floating  debt,  and  as 
floating  debt  is  the  usual  accompaniment  of  insolvency, 
these  notes  have  heretofore  been  regarded  as  indicating  a 
tendency  toward  a  financial  breakdown.  This  they  proved 
to  be  in  1872,  and  again  in  1892,  but  in  1903  they  served 
to  tide  over  a  crisis.  Their  use  is  not  necessarily  equiva- 
lent to  a  confession  of  financial  weakness  in  a  railroad 
itself,  but  an  indication  that  capital  has  fallen  tempo- 
rarily behind  the  demand.  In  1903  and  1904  upwards  of 
$200,000,000  of  short-term  notes  were  put  out  by  four- 
teen American  railroads,  at  rates  ranging  from  four  and 
one-half  to  five  per  cent  and  for  terras  ranging  from  ten 
to  fifteen  years.  All  which  have  fallen  due  have  been 
provided  for,  though  receivership  has  not  been  averted 
in  all  cases.  The  first  half  of  1907  saw  a  recurrence  of 
conditions  necessitating  the  payment  of  high  rates  for 
capital.  In  consequence,  over  $300,000,000  of  short-term 
notes  were  issued,  $60,000,000  of  which  were  put  out  by 
the  Pennsylvania  alone.  These  issues  were  sold  by 
bankers,  who  bought  them  at  prices  ranging  from  ninety- 
seven  to  par.  As  most  of  them  bore  five  per  cent,  interest, 
the  cost  of  the  money  to  the  companies  was  about  seven 
per  cent.  The  Erie,  however,  issued  notes  which  bore 
six  per  cent.  Unlike  all  the  other  issues,  these  notes 
were  discounted  on  an  eight  per  cent,  basis  in  much  the 
same  manner  that  ordinary  commercial  paper  is  dis- 
counted. 

Short-term  notes  may  be  secured  by  collateral,  as  in  the 

48 


CAPITAtlZATION 

case  of  the  Pennsylvania  issue,  or  they  may  have  behind 
them  only  the  earning  power  and  credit  of  the  corpo- 
ration. In  the  latter  case,  they  rank  between  income 
bonds  and  preferred  shares  as  claimants  upon  the  assets. 
Most  notes  are  issued  in  denominations  of  $1000,  but  the 
Pennsylvania  notes  already  referred  to  were  issued  in 
denominations  of  $5000,  and  the  New  York,  New  Haven, 
and  Hartford  notes,  in  denominations  ranging  from 
$5000  to  $50,000.  Many  of  the  notes  of  1907  were  issued 
for  the  purpose  of  extending  those  put  out  in  1903  and 
1904,  but  unlike  the  notes  of  that  period  none  were  to 
run  for  more  than  five  years.  A  novel  method  of  short- 
term  borrowing  was  adopted  by  the  Atchison  in  1902. 
Instead  of  issuing  notes  of  the  usual  sort,  $30,000,000  of 
five  per  cent,  serial  debentures  were  put  out  in  twelve 
series,  one  of  which  is  to  mature  each  year  to  1915.  These 
debentures  are  absolute  obligations  of  the  company  as  to 
principal  and  interest,  but  they  are  unsecured.  In  issu- 
ing them,  however,  the  corporation  agreed  that  it  would 
not  execute  any  new  mortgage  without  including  within 
its  terms  all  of  the  debentures  which  might  be  outstanding. 


CHAPTER  IV 
FINANCES    OF    CONSTRUCTION 

Definition. — Construction  may  be  considered  as  the 
building  of  all  the  fixed  properties  used  by  a  railroad  in 
conducting  the  business  of  transportation.  It  pertains, 
therefore,  to  the  roadway  and  structures  as  distinguished 
from  rolling  stock  and  other  equipment.  In  its  fullest 
sense  it  comprehends  grading,  tunneling,  construction  of 
bridges,  trestles  and  culverts;  purchase  and  laying  of 
ties,  rails,  and  other  parts  of  the  roadway  including  bal- 
last; building  and  equipping  of  stations  and  office  build- 
ings, shops,  and  engine-houses,  as  well  as  water  front 
structures  and  power  plants.  It  also  includes  engineer- 
ing, supervision,  and  inspection,  and  the  acquiring  of  fee 
title  to  lands  and  right  of  w^ay.  Cost  of  construction  may 
be  understood  as  made  up  of  outlays  for  building  opera- 
tions, plus  interest  on  outlays  during  the  construction 
period,  less  deductions  for  salvage  and  for  charges  for 
transportation  during  construction ;  in  other  words,  the 
net  expense  to  the  railroad  corporation. 

Construction  Financed  Tlirough  Sales  of  Sltat'cs. — Con- 
struction of  the  early  local  railroads  was  generally  financed 
by  means  of  the  proceeds  of  sales  of  corporate  shares.  It 
was  the  practice  to  begin  with  subscriptions  to  share  capi- 
tal by  persons  interested  in  local  manufacturing  or  com- 
mercial enterprises  or  by  local  investors  who  had  accumu- 
lated savings  or  inherited  small  estates.  These  subscrip- 
tions were  paid  in  cash ;  the  shareholders  as  proprietors  of 
the  corporation  thus  held  the  chief  beneficial  interest  in  the 
properties,  and  they  chose  the  directors  from  among  their 
number  in  much  the  same  manner  as  officers  were  chosen 
at  a  town  meeting.     This  is  particularly  true  of  the  New 

50 


FINANCES  OF  CONSTRUCTION 

England  railroads.  The  Eastern  railroad  of  Massachu- 
setts was  built  as  far  as  the  New  Hampshire 
line  by  1840,  and  the  cost,  amounting  to  $1,365,- 
000,  was  met  through  sales  of  shares.^  The  Boston 
and  Lowell  was  also  built  out  of  the  proceeds  of  share 
sales;  and  no  bonds  were  issued  until  nearly  twenty  years 
after  the  opening  of  the  road.^  In  central  New  York,  the 
Syracuse  and  Utica  railroad  was  built  at  a  cost  of  $700,000, 
or  $100,000  less  than  the  amount  of  subscribed  share  capi- 
tal.^ This  was  the  method  common  to  the  railroads  of  the 
Atlantic  seaboard  states  prior  to  1840.  Even  the  Penn- 
sylvania railroad  was  begun  with  the  idea  that  sales  of 
shares  would  provide  all  the  capital  needed,  but  the  task 
proved  too  great  for  the  available  investment  funds  of 
Philadelphia,  and  to  prevent  unprofitable  delays  the  policy 
of  the  company  was  changed  so  as  to  limit  the  mortgage 
indebtedness  to  the  amount  of  the  share  capital. 

Supplementary  Bond  Issues. — The  use  of  bond  issues  as 
a  means  of  raising  capital  for  construction  was  usually  the 
result  of  miscalculation.  Lack  of  engineering  experience, 
indefiniteness  of  plans,  estimates  based  upon  the  analog.v 
of  the  turnpike;  these  were  some  of  the  most  common 
causes  of  exhaustion  of  funds  before  completion  of  the 
work  of  construction.  There  arose,  therefore,  the  prob- 
lem of  supplementary  financing.  Sometimes  it  was  pos- 
sible to  obtain  additional  funds  through  the  issuance  of 
new  shares,  but  where  the  local  supply  of  investment  capi- 
tal made  this  impossible,  there  was  no  alternative  but  to 
issue  long  time  obligations  secured  by  mortgage  giving  to 
the  new  contributors  prior  claim  against  the  corporate 
estate. 

With  all  the  unforeseen  demands  for  additional  capital, 

however,  the  bonded  debt  of  the  first  American  railroads 

1  Annual  report,  1875.  2  Annual  report,    1853. 

»  Wager,  "Syracuse  and  Utica  Railroad,"  Oneida  Hist.  Soc, 
Transaclions,  I,   153. 

51 


RAILROAD  FINANCE 

was  small  indeed.  Before  3850  the  construction  capital 
of  roads  built  in  New  England  was  almost  wholly  ob- 
tained from  sales  of  shares.  This  is  clearly  shown  by  their 
annual  reports  to  shareholders.  In  1849  the  Providence 
and  Worcester  had  outstanding  $424,000  in  bonds  as  against 
$1,166,000  in  share  capital.  The  Delaware,  Lackawanna, 
and  Western  in  1854  had  a  paid  share  capital  of  $1,958,000 
and  a  funded  debt  of  only  $900,000 ;  the  New  Jersey  rail- 
road in  1855  reported  a  debt  of  only  $317,000,  with  a  share 
capital  of  $1,294,000;  and  the  Cincinnati,  Hamilton,  and 
Dayton  in  1855  showed  a  similar  condition,  with  $965,000 
in  bonds  and  $2,100,000  in  shares.  When  in  1848  it  was 
proposed  to  extend  the  Louisa  railroad  into  Richmond, 
only  $40,000  could  be  raised  from  new  subscriptions  to 
capital  shares,  and  the  directors  therefore  issued  bonds 
which  they  personally  indorsed.* 

Generally  speaking,  the  disposition  of  the  shareholders 
was  to  keep  the  indebtedness  down  to  a  small  proportion 
of  the  total  capital,  and  so  insure  control.  This  attitude 
was  reflected  in  the  report  of  the  directors  of  the  Michigan 
Central  in  1854,  when  in  discussing  the  necessity  of  pro- 
viding for  the  floating  debt  either  by  an  issue  of  bonds 
or  by  the  sale  of  more  shares  they  said,  "We  prefer  the 
last  named  measure,  and  shall  only  resort  to  a  further 
issue  of  bonds  in  case  we  find  it  impossible  to  sell  our 
stock  at  par."  And  the  Boston  and  Providence,  though 
compelled  to  resort  to  an  issue  of  bonds,  gradually  re- 
duced its  debt  until  in  1865  it  amounted  to  only  $21,500. 

Exchange  of  Shares  for  Land,  Labor,  and  Materials. — 
In  the  Middle  West  there  was  insufficient  local  capital  in 
a  form  readily  convertible  into  cash.  The  capital  of  the 
community  was  represented  largely  by  farm  improve- 
ments. The  products  of  the  farm,  the  forest,  and  the 
mine  could  not  be  readily  marketed  and  converted  into 

4  "Hist,  of  the  Chesapeake  and  Ohio,"  8. 

52 


FINANCES  OF  CONSTRUCTION 

cash  until  after  the  introduction  of  improved  methods  of 
transportation.  It  was  therefore  impossible  to  finance 
railroad  construction  through  cash  subscriptions  to  shares. 
In  recognition  of  this  condition,  there  was  resort  to 
barter,  or  exchange  of  the  shares  of  railroad  companies 
for  land,  labor,  and  materials.  To  obtain  the  money 
needed,  shares  were  exchanged  for  farm  mortgages  and 
other  credit  obligations  which  might  be  discounted.  Thus, 
while  the  construction  of  the  Bellefontaine  and  Indiana 
and  of  the  Indianapolis  and  Bellefontaine  lines  was 
financed  for  the  most  part  through  the  sale  of  capital 
shares,  subscriptions  were  paid  largely  in  land,  and  to 
some  extent  in  labor  and  materials.^  The  weakness  of  this 
practice  is  at  once  apparent.  It  limited  the  activities  of 
the  management,  and  frequently  caused  loss  to  the  farm- 
ers, with  the  result  that  the  railroads  were  embarrassed 
through  hostile  legislative  and  administrative  action. 

Share  Capital  for  Roadbed;  Bonds  for  Bails  and  Equip- 
ment.— When  promoters  were  able  to  procure  sufficient 
local  subscriptions  to  share  capital  to  complete  the  road- 
bed, they  had  a  basis  for  credit  which  enabled  them  to 
dispose  of  bonds  to  provide  for  the  rails  and  equipment. 
This  was  the  plan  followed  by  many  railroads  in  the 
South  and  in  the  Middle  West.^  It  was  a  natural  and 
almost  necessary  method  in  communities  where  local  capi- 
tal was  inadequate,  and  where  subsidies  were  not  avail- 
able in  amounts  sufficient  to  serve  as  a  guarantee  to  the 
non-resident  investor.  The  use  of  bonds  as  a  means  of 
providing  for  original  capitalization  almost  invariably  in- 
dicated the  presence  of  outside  capital. 

Subsidies  as  Collateral  Aids  to  Capitalization. — Subsi- 
dies have  played  an  important  part  in  the  financing  of 
construction.     Before  the  railroad  period,  the  lottery  was 

0  Cleveland  and  Powell,  "Railroad  Promotion,"  198-201. 
tibid.,  197-8. 

53 


RAILROAD  FINANCE 

in  coramon  use  as  a  means  of  aiding  enterprises  which 
were  public  in  their  nature.  But  after  the  corporation 
had  come  into  common  use  as  an  agency  for  assembling 
capital  and  controlling  large  enterprises,  public  senti- 
ment changed ;  and  the  lottery  privilege  was  granted  in 
aid  of  but  one  or  two  railroad  projects^  Popular  inter- 
est was  aroused  sufficiently  to  warrant  more  substantial 
aid,  and  when  share  subscriptions  were  inadequate,  or 
when  additional  evidence  of  support  was  desired  as  a 
means  of  attracting  outside  capital  through  the  sale  of 
bonds,  public  subsidies  in  the  form  of  subscriptions  to 
shares  or  of  guarantees  of  bonds  were  granted  by  both 
state  and  local  governments.  There  were  also  public  and 
private  subsidies  in  the  form  of  donations  of  land  for 
right  of  way  and  for  yards  and  station  sites,  not  to  men- 
tion the  larger  grants  of  lands  which  were  to  be  sold  to 
raise  funds  for  construction  work.  Perhaps  the  most  im- 
portant factor  in  keeping  the  capital  cost  of  American 
railroads  down  to  a  figure  which  is  low  by  comparison 
with  the  railroads  of  Europe  has  been  the  American  prac- 
tice of  donating  lands  for  right  of  way.  Another  factor 
which  has  contributed  to  lower  capital  cost  in  the  United 
States  has  been  the  power  given  to  railroad  corporations 
to  obtain  rights  of  way  by  eminent  domain,  whereas  in 
England  they  were  compelled  to  obtain  their  land  by 
private  bargaining. 

Bonds  Favored  hy  Investors. — Failure  to  build  within 
estimates,  calls  for  assessments  to  put  in  proper  condition 
the  inferior  work  turned  over  by  contractors,  and  delays 
in  the  payment  of  dividends,  eventually  led  investors  to 
regard  railroad  shares  as  of  uncertain  value,  and  to  put 
their  savings  into  railroad  bonds.  Bonds,  although  they 
often  proved  to  be  in  excess  of  the  value  of  the  property, 
were  believed  to  be  adequately  secured  not  only  by  the 

T  Ibid.,  167. 

54 


FINANCES  OF  CONSTRUCTION 

priority  of  the  claim  held  against  the  estate,  but  also  by 
the  prospective  value  of  the  territory  which  would  be  de- 
veloped by  the  road.  This  attitude  of  mind  led  to  an 
entirely  new  system  of  financing  construction,  as  has  been 
set  forth  by  John  P.  Davis: 

Railway  bonds  had  luuoli  resemblance  to  government  securi- 
ties; tlie  railways  did  not  appear,  at  first  blush,  to  be 
dependent  on  the  efforts  of  individuals,  but  rather  on  the 
condition  of  the  tributary  country,  and  their  income  was 
quite  similar  to  the  taxes  paid  to  the  government.  The  investor 
in  railway  bonds  seemed  to  be  putting  his  faith  not  in  a  Vander- 
bilt  or  Gould,  but  in  the  manufacturers,  farmers,  producers,  and 
consumers  of  the  tributary  territory  upon  which  the  roads  de- 
pended for  their  success.  The  autocratic  influence  of  "railroad 
managers"  had  not  been  appreciably  exerted.  The  disastrous  re- 
sults of  competition  and  "rate  wars"  had  not  yet  been  felt.  If  a 
railway  could  not  pay  the  interest  on  its  bonds,  rates  could  be 
increased,  and  if  it  could  pay  the  interest  on  its  bonds,  it  could 
by  a  little  more  pressure  on  the  tributary  territory  be  made  to 
pay  some  interest  even  on  stock  and  more  bonds.  Thus  the  value 
of  railways  came  to  be  tletermined  not  by  the  expense  of  building 
them,  but  by  the  amount  of  bonds  and  stock  that  their  tributary 
territory  could  carry.s 

Bonds  Sold  at  Discount;  Shares  Given  as  Bomis. — The 
facility  with  which  public  subsidy  bonds  and  bonds  of  the 
railroads  themselves  were  sold,  suggested  to  promoters  the 
possibility  of  building  entirely  out  of  the  proceeds  of 
bonds,  keeping  the  shares  for  themselves  as  a  source  of 
future  profit.  The  share  capital  was  subscribed  as  before, 
in  conformity  with  the  law,  but  only  a  nominal  cash  pay- 
ment was  made  to  defray  the  expenses  of  obtaining  the 
charter  and  of  forming  the  preliminary  organization.  The 
bonds  were  then  sold  at  ruinous  discounts,  or  exchanged 
at  extravagant  prices  for  construction  work,  services,  and 
materials.     Shares  were  often  given  as  a  bonus  to  facili- 

8  Davis,    "Union    Pacific,"    197. 

55 


RAILROAD  FINANCE 

tate  the  placing  of  the  bonds.  In  the  end  the  promoters 
had  control  of  the  property,  which  had  cost  them  little 
or  nothing,  and  this  property  was  mortgaged  far  in  ex- 
cess of  its  value.  Their  control  over  the  share  capital 
made  it  possible  for  them  to  declare  unwarranted  divi- 
dends, and  thus  to  advance  prices  and  so  afford  them- 
selves opportunity  to  unload  at  a  profit.  The  next  logi- 
cal step  for  the  corporation  was  bankruptcy;  and  in  the 
process  of  reorganization  the  bonds  were  scaled  down  or 
subjected  to  heavy  assessment.  Such  was  the  common 
course  of  railroad  construction  after  about  1850. 

Land  Bonds. — Land  grant  railroads  have  made  every 
effort  to  sell  their  lands  to  provide  funds  for  construction ; 
but  sales  have  usually  been  slow  until  after  the  comple- 
tion of  the  road,  and  land  bonds  have  been  frequently 
issued  instead.  Sometimes  the  lands  were  included  with 
the  other  property  as  part  of  the  security  for  the  first 
mortgage  bonds,  as  in  the  case  of  the  Mobile  and  Ohio.^ 
Usually,  however,  a  separate  issue  of  securities  was  made. 
Thus  the  Chicago,  St.  Paul,  and  Fond  du  Lac  issued 
$3,600,000  of  land  grant  bonds,i<'  and  the  Toledo,  Wabash, 
and  "Western  issued  .$450,000  of  "real  estate"  bonds.^^ 
The  Illinois  Central  set  aside  the  greater  part  of  its  lands 
as  security  for  the  first  mortgage  bonds,  and  also  reserved 
a  large  acreage  as  security  for  interest.  The  report  for 
1856  shows  that  while  the  company  had  $16,878,000  of 
bonds  outstanding,  only  $3,258,000  had  been  paid  in  on 
its  share  capital.  Receipts  from  the  sales  of  lands  were 
sometimes  mortgaged,  as  in  the  case  of  the  Atchison,  To- 
peka,  and  Santa  Fe,  which  in  1874  issued  "land  income" 
bonds. 

Net  Earnings  Applied  to  Construction. — With  the  early 
New  England  roads,  the  construction  of  which  was  financed 

»  Amer.  Railroad  Jour.,  XXV,  515. 

10  Annual  report,  1857.  n  Annual  report,    1856. 

56 


FINANCES  OF  CONSTRUCTION 

by  sales  of  shares,  the  practice  was  to  use  the  net  earn- 
ings  from  operation  of  the  completed  sections  to  pay  divi- 
dends. After  the  introduction  of  bond  construction,  how- 
ever, the  practice  was  changed,  the  net  earnings  on  the 
completed  portions  being  generally  applied  to  the  prop- 
erty as  an  offset  to  cost.  Many  of  the  roads  at'  the 
time  they  were  completed  had  a  large  floating  debt  in 
the  form  of  contractors'  bills,  unadjusted  claims,  and  con- 
struction notes.  These  obligations,  properly  chargeable  as 
part  of  the  cost,  in  some  instances  were  met  by  appro- 
priations from  earnings;  in  others  they  were  funded  by 
bond  issues.  Some  of  the  companies  attempted  to  carry 
them  along  without  distinguishing  between  the  floating 
debt  incurred  for  construction  and  the  floating  debt  in- 
curred in  operation. 

AGENCIES  OF   CONSTRUCTION 

Construction  Directly  'by  the  Railroad. — In  some  in- 
stances construction  was  carried  on  by  the  railroad  cor- 
poration itself  as  a  construction  company;  as  for  example 
the  Camden  and  Amboy,  which  reserved  the  work  upon 
some  of  the  more  difficult  sections  of  the  road  in  order 
that  they  might  be  more  quickly  completed. ^^  Generally 
speaking,  however,  there  was  resort  to  contracts.  Circum- 
stances have  sometimes  forced  railroads  into  the  work  of 
construction.  In  the  building  of  the  Coal  and  Coke  rail- 
way of  West  Virginia,  because  of  the  failure  of  the  con- 
tractors, it  was  necessary  for  the  company  to  take  over  one 
unfinished  section  of  the  road  and  with  its  own  forces 
carry  it  to  completion. ^^ 

Early  Railroads  Built  hy  Small  Contractors. — The  earli- 
est railroads  were  built  by  small  contractors,  but  the 
results  of  this  method  were  often  unsatisfactory.  As  soon 
as  the  line  was  completed  sufficiently  to  allow  the  opera- 

^2  Hazard's  Register  of  Pa.,  VIT.  361.  i3  Annual  report,  1905. 

57 


RAILROAD  FINANCE 

tion  of  trains,  it  was  surrendered  to  the  company,  which 
had  then  to  make  large  additional  expenditures  to  place 
the  property  in  proper  condition.  After  the  completion 
of  construction  work  upon  the  Boston  and  Maine,  the  di- 
rectors reported:  "IMost  of  the  work  on  the  road  was,  at 
first,  done  by  contract,  and,  of  course,  was  less  perfect  than 
that  done  by  the  company.  A  great  deal  of  the  masonry, 
built  by  contract,  has  been  rebuilt, — many  whole  bridges 
and  culverts  have  been  built  in  a  much  more  substantial 
and  thorough  manner  than  they  were  at  first;  and  on 
account  of  the  imperfect  manner  in  which  the  roadbed 
was  graded  and  dressed,  as  originally  done,  it  has  become 
necessary  to  raise  large  portions  of  it  from  one  to  two 
feet:  giving  it  a  new  dressing  of  gravel  to  protect  it  from 
frost,  and  keep  the  superstructure  in  surface.  .  .  . 
The  ties  .  .  .  used  are  larger  and  better  than  those 
laid  down  generally  when  the  road  was  first  built."" 

Large  Contractors  and  Construction  Companies. — At  a 
very  early  period,  construction  work  was  let  to  large  con- 
tractors, who  would  engage  to  build  an  entire  line,  sub- 
letting different  sections  to  small  contractors.  Some  of 
these  companies  also  engaged  to  supply  the  equipment. 
In  most  instances  they  received  part  payment  in  securities 
of  the  road,  and  often  in  public  subsidy  bonds.  Contracts 
on  the  New  York  and  Erie  were  let  subject  to  the  provi- 
sion that  part  payment  would  be  made  in  shares  at  the 
market  priee.^^  In  such  instances  part  of  the  shares  were 
carried  in  the  treasury  until  they  were  issued  under  the 
terms  of  construction  contracts.  Contractors  on  the 
South  Western  railroad  of  Georgia  received  two-thirds  of 
their  payment  in  bonds  and  one-third  in  shares  at  par,^' 

Contract  Work  Paid  for  in  Securities. — Upon  the  Green- 
ville and   ]\Iiami  railroad,   half   of   the  contractors'  bills 

1*  Annual   report,    1849. 

15  Report  of  the  committee  appointed  to  investigate  the  New  York 
and  Erie,  44-6.      (1842.)  is  Annual   report,   1853. 

58 


FINANCES  OF  CONSTRUCTION 

were  paid  in  cash  and  half  in  shares  and  bonds  of  the 
company.^^  The  North  Missouri  railroad  appropriated  for 
payment  for  construction,  subsidy  bonds  issued  by  the 
state  of  Missouri,  bonds  of  the  city  and  county  of  St.  Louis, 
and  a  small  amount  of  capital  shares.^^ 

A  peculiar  construction  contract  was  made  in  1848  by 
the  New  York  and  Erie  with  individuals  on  the  section 
of  the  route  between  Binghamton  and  Corning.  It  pro- 
vided that  these  men  should  build  this  section  of  the  road, 
supplying  all  materials  except  the  rails,  in  return  for 
certificates  secured  upon  the  income  of  that  section.  This 
agreement  was  carried  out;  but  bonds  were  subsequently 
issued  in  exchange  for  the  income  certificates.^^  The 
Atlantic  and  Great  Western  made  a  contract  for  the  com- 
pletion of  the  road  between  Dayton  and  Mansfield,  under 
the  terms  of  which  interest  charges  on  the  bonds  paid  for 
construction  should  begin  not  at  the  date  of  their  issue, 
but  at  the  date  of  the  contractor's  receipts  and  bills  of 
purchase.  By  this  arrangement  the  company  insured  itself 
against  the  usual  loss  incurred  through  interest  payments 
during  the  progress  of  construction.-" 

The  Dependent  or  '^Inside"  Construction  Company. — 
With  the  extension  of  railroads  into  the  undeveloped  por- 
tions of  the  West  and  South,  the  promise  of  adequate 
returns  from  operation  was  not  sufficient  to  make  the 
securities  of  the  railroad  company  attractive  to  those  to 
whom  appeal  was  made  for  construction  capital.  Promo- 
ters therefore  had  to  share  with  contractors,  grants  of 
government  land  and  subsidy  bonds  of  counties  and  munici- 
palities,  or  resort  to  the  organization  of  subsidiary  rail- 
road construction  companies.  In  consequence,  the  railroads 
in  those  sections  of  the  country  have  been  generally  built 
not  because  they  were  needed,  but  because  promoters  saw 

17  Annual    report,    1853.  i»  Annual  report,   1849. 

18  Annual  report,  1855,  20  Annual   report,    1856. 

59 


RAILROAD  FINANCE 

opportunity  for  large  immediate  profits  by  building  them. 
The  customary  procedure  has  been  well  described  as  fol- 
lows : 

The  railway  builder,  urged  on  by  the  people  whose  towns, 
factories,  and  farms  would  be  benefited  by  increased  facilities 
of  transportation,  soon  found,  shrewdly  enough,  that  he  could 
usually  build  his  road  from  the  bonuses  of  the  future  patrons 
of  the  road,  and  the  proceeds  of  the  bonds  that  eastern  investors, 
encouraged  by  glittering  I'eports  of  the  communities  through 
which  it  was  to  pass,  would  invest  in ;  then  he  would  have  the 
stock  of  the  road  and  the  privilege  of  operating  it  for  the  profit 
of  his  venture ;  if  the  road  should  be  prosperous,  his  stock  would 
be  valuable ;  if  not,  he  could  at  last  contrive  by  some  means  to 
declare  a  dividend  or  two  and  unload  his  stock.21 

Large  Profits  of  Promoters. — By  strict  interpretation  of 
law  as  announced  in  judicial  decisions,  the  amount  of 
securities  which  may  be  issued  has  been  limited  to  funds 
or  properties  acquired.  But  the  freedom  permitted  in 
determining  and  stating  cost  has  left  the  officers  practi- 
cally without  limitation.  The  cost,  as  interpreted  by  those 
in  control,  was  the  amount  of  the  capital  issues.  Except 
for  charter  restrictions  there  was  no  limit  to  the  amount 
of  bonds  and  share  capital  which  promoters  as  directors 
of  a  railroad  company  might  issue  to  themselves  as  pro- 
prietors of  an  inside  construction  company  in  payment  for 
the  road.  Thus  the  par  or  nominal  value  bears  little  or  no 
relation  to  the  actual  cost  of  the  property.  To  Newton 
Booth  we  are  indebted  for  this  description  of  the  manner 
in  which  railroads  were  built: 

For  many  years  it  has  not  been  the  American  fashion  for  the 
owners  of  railroads  to  put  their  own  money  into  their  construction. 
If  it  had  been  it  would  have  insured  a  more  conservative  and 
businesslike  use  of  that  species  of  property.  The  favorite  plan 
has  been  to  get  grants  of  land,  and  loans  of  credit  from  the 
General  Government ;  guarantees  of  interest  from  the  State  gov- 

21  Davis,  198. 

60 


FINANCES  OF  CONSTRUCTION 

ernments ;  subscriptions  and  donations  from  counties,  cities  and 
individuals ;  and  upon  the  credit  of  all  this,  issue  all  bonds  that 
can  be  put  upon  the  market ;  make  a  close  estimate  as  to  how 
much  less  the  road  can  be  built  for  than  the  sum  of  these  assets ; 
form  a  ring  .  .  .  for  the  purpose  of  constructing  the  road, 
dividing  the  bonds  that  are  left ;  owning  the  lands,  owning  and 
operating  the  road  until  the  first  mortgage  becomes  due  and 
graciously  allowing  the  Government  to  pay  principal  and  interest 
upon  the  loan  of  her  credit,  while  "every  tie  in  the  road  is  the 
grave  of  a  small  stockholder."  Under  this  plan  the  only  men 
In  the  community  who  are  absolutely  certain  not  to  contribute 
any  money  are  those  who  own  and  control  it  when  it  is  finished. 
The  method  requires  a  certain  kind  of  genius,  political  influence, 
and  power  of  manipulation,  and,  furnished  one  clew  to  the  reason 
why  railroads  "interfere  in  politics."  The  personal  profit  upon 
this  enterprise  is  not  a  profit  upon  capital  invested,  but  the  result 
of  brain  work — administrative  talent  they  call  it — in  a  particular 
direction.22 

Use  of  Privileged  Information  for  Personal  Profit. — ^Pro- 
moters gained  or  lost  upon  their  ventures  in  railroad  con- 
struction as  they  were  able  to  unload  their  inflated  securi- 
ties  upon  the  public;  but  there  were  many  other  oppor 
tunities  open  to  them  which  seldom  failed  to  bring  a  profit 
There  were  the  land  grants,  which  they  sometimes  dis- 
severed  from  all  connection  with  the  other  property  of  the 
road,  and  sold  or  leased.  There  were  also  opportunities 
for  large  profits  from  operations  in  real  estate.  As 
individuals,  promoters  would  purchase  sites  for  shops, 
stations,  and  terminals  before  their  location  was  publicly 
announced,  and  then  turn  the  land  over  to  the  railroad  at 
a  large  advance  in  price.  In  the  same  manner  they  would 
sometimes  obtain  town  sites,  and  divert  the  route  of  the 
railroad  to  afi^ord  themselves  opportunity  to  sell  out  to 
settlers.  In  locating  the  line  of  the  Milwaukee  and  Mis- 
sissippi   railroad,    Byron   Kilbourn   refused   to   cross   the 

22  Booth,  "The  Issue  of  the  Day;"  speech  at  San  Francisco,  August 
12,    1873:   4-5. 

61 


RAILROAD  FINANCE 

Wisconsin  river  at  Newport,  but  chose  instead  a  vacant 
site,  owned  by  him  and  bearing  his  name,  a  few  miles  up 
the  river.  To-day,  nothing  remains  of  the  town  of  New- 
port, while  Kilbourn  has  about  half  the  population  which 
Newport  had  before  the  building  of  the  railroad. 

Speculative  Land  Companies. — In  many  instances  pro- 
moters have  formed  land  companies  for  the  purpose  of 
carrying  on  their  speculative  operations.  Upon  the  St. 
Joseph  and  Denver  City,  there  was  the  Kansas  and  Ne- 
braska Land  company ;  and  upon  the  Northern  Pacific,  the 
Lake  Superior  and  Puget  Sound  Land  company  so  sapped 
the  resources  of  the  railroad  company  as  to  contribute  ma- 
terially to  its  downfall  in  1873. 

Type  of  Construction  Company  Contracts. — Examples 
of  construction  company  contracts  could  be  cited  at  great 
length.  The  Logansport,  Crawfordsville,  and  South 
Western  railroad  agreed  with  its  director-contractors  to 
turn  in  all  the  municipal  subsidy  bonds,  capital  shares, 
and  bonds.  About  $1,000,000  was  actually  paid  out  on 
account  of  construction,  and  for  this,  over  $4,000,000  of 
securities  were  issued.-^  The  JMorgan  Improvement  Com- 
pany, made  up  of  directors  and  others  in  the  Oilman, 
Clinton,  and  Springfield  railroad,  took  the  contract  for 
construction.  Its  actual  expenditure  was  $1,500,000,  but 
the  cost  to  the  railroad  company  was  $2,000,000  in  first 
mortgage  bonds,  $1,400,000  in  shares,  and  $598,000  in 
municipal  subsidy  bonds."* 

The  Iowa  and  Mississippi  River  Construction  company, 
which  Avas  organized  by  some  of  the  directors  of  the  Chi- 
cago, Dubuque,  and  Minnesota  railroad,  agreed  to  build 
the  road  for  $25,000  in  railroad  bonds  and  $37,500  in 
shares  per  mile,  together  with  all  the  local  subsidy  bonds. 

23  Hassler,   "Railroad   Ttinps,"   10. 

^■»S\V!iiii.  ''Economic  A.'spccts  of  Railroad  Receiverships,"  Economic 
Studies,  III,  93. 

62 


FINANCES  OF  CONSTRUCTION 

The  contract  provided  that  if  the  construction  company, 
after  exhausting  its  assets,  including  its  share  capital  of 
$300,000,  should  find  that  it  was  unable  to  complete  the 
road,  it  would  be  relieved  from  all  further  liability,  and  the 
railroad  company  would  accept  the  road  in  its  unfinished 
state.  Under  these  conditions  the  construction  company 
received  $5,082,500  for  work  which  cost  $4,282,500.  Of 
the  balance  of  $800,000,  only  $173,000  could  be  accounted 
for.  A  similar  contract  was  made  with  the  Chicago,  Clin- 
ton, and  Dubuque  railroad.  In  this  case  the  construc- 
tion company  agreed  to  build  and  equip  the  road  in  return 
for  $25,000  per  mile  in  bonds  and  $21,000  in  capital  shares 
per  mile,  38,000  acres  of  land,  and  all  donations  and  lax  aid. 
For  the  supervision  and  management  of  the  work  and  the 
expenditure  of  its  $140,000  of  share  capital,  the  construc- 
tion company  was  to  receive  all  of  the  shares  and  bonds 
of  the  railroad.  Furthermore,  it  was  provided  that  if  the 
assets  of  this  company  should  prove  insufficient  to  com- 
plete the  road,  it  would  be  relieved  from  further  obliga- 
tions and  become  entitled  to  the  land  grant  and  to  the 
shares  and  bonds.  Under  this  contract  forty-eight  miles 
were  constructed  before  the  assets  of  the  construction 
company  were  exhausted.  Meanwhile  the  railroad  had 
turned  over  $1,500,000  of  its  bonds,  worth  $1,350,000.-=^ 
Such  practices  were  then  legal  under  the  laws  of  Iowa; 
and  in  consequence  railroad  construction  companies 
flourished  in  that  state.  Pennsylvania  also  contributed  to 
the  abuse  by  granting  special  charters — "roving"  char- 
ters, as  they  were  aptly  called — for  companies  which  were 
allowed  to  change  their  name  and  purpose,  and  to  in- 
crease the  amount  of  capital  at  will.  Thus  the  Dominion 
Land  company,  organized  with  a  subscribed  capital  of 
$100,000,  was  immediately  transformed  into  the  Caliroinia 
and  Texas  Railway  Construction  company,  with  a  nominal 
25  Commercial   and  Financial   Chronicle,   XX,    185-6. 

63 


RAILROAD  FINANCE 

capital  of  $10,000,000.  It  then  took  the  contract  for  con- 
structing the  Texas  and  Pacific  railroad.  When  this  rail- 
road went  into  a  receiver's  hands  in  1885,  an  investigat- 
ing committee  found  that  the  "wretched  condition"  of 
the  property  was  due  to  "inferior  construction  and  in- 
ferior material  used  by  the  construction  company."  The 
New  Orleans  division  was  reported  to  be  half  the  time  un- 
der water."" 

Wisconsin  Central. — The  Wisconsin  Central,  originally 
the  Portage,  Winnebago,  and  Superior  railroad,  was  built 
by  a  construction  company  at  the  head  of  which  were  the 
president  and  general  manager  of  the  railroad.  The  direc- 
tors of  the  railroad  company  on  accepting  the  work  were 
forced  to  admit  that  it  was  worth  less  than  its  cost.  They 
thought  it  necessary,  however,  to  report: 

The  officers  of  the  Construction  Company,  by  the  terms  of  their 
contract,  were  to  receive  no  compensation  whatever  except  their 
respective  salaries,  which  were  fixed  in  their  contract,  and 
they  never  have,  to  the  best  of  our  linovvledge  and  belief,  received 
in  any  manner  any  profits  or  private  gain  or  advantage,  directly 
or  indirectly,  from  their  connection  with  this  work.  They  con- 
tracted originally  not  even  to  invest  in  any  way  in  property 
along  the  line  of  the  road  while  it  was  in  their  charge ;  and 
your  Directors  believe  that  they  have  fulfilled  this  agreement  in 
the  most  exact  and  honorable  manner,  both  in  its  letter  and 
spirit.27 

Whatever  may  be  the  facts  behind  the  statement,  it  is 
noteworthy  as  indicating  the  general  practice  in  railroad 
construction  at  that  time. 

The  Credit  Mohilier. — Political  scandals  arising  from 
the  construction  of  the  Union  Pacific  have  given  to  the 
operations  of  the  Credit  Mobilier  a  notoriety  unwarranted 
by  their  actual  importance.  The  subject  has  been  thor- 
oughly investigated  by  congressional  committees,  and  dis- 

26 /bid.,  XLI,  714.  27  Annual  report,  1878. 

64 


FINANCES  OF  CONSTRUCTION 

cussed  both  in  political  pamphlets  and  in  scholarly 
treatises.  The  main  facts  are  therefore  established.  From 
the  financial  point  of  view,  the  Credit  Mobilier  should  be 
regarded  not  as  an  exception,  but  as  a  type  of  the  construc- 
tion companies  which  have  built  most  of  the  railroad  mile- 
age in  this  country.  Where  different  methods  have  been 
employed,  it  has  been  to  suit  particular  circumstances. 
In  all  cases  the  purpose  and  the  results  have  been  the  same. 
Building  of  the  Union  Pacific. — Organization  of  the 
Union  Pacific  railroad  was  effected  in  1862,  and  an 
attempt  was  made  at  once  to  build  the  road.  In  two 
years  $600,000  was  expended  on  construction,  but  the 
amount  received  from  subscriptions  to  the  shares  was  only 
$218,000.  In  1864  a  committee  was  appointed  to  solicit 
bids  from  contractors,  but  without  result.  No  men  of  any 
financial  responsibility  were  connected  with  the  work.  In 
order  to  make  the  enterprise  more  attractive  to  capital, 
Thomas  C.  Durant,  the  vice-president  and  active  head, 
decided  to  form  a  construction  company.  First,  however, 
a  contract  for  the  construction  of  one  hundred  miles,  at 
$50,000  per  mile  payable  in  securities,  was  awarded  to  a 
"dummy"  named  Hoxie,  who  was  an  employee  of  the 
company.  Hoxie  then  proposed  that  if  this  contract 
should  be  extended  to  the  one-hundredth  meridian  or  147 
miles  further  to  the  west,  he  would  take,  or  cause  to  be 
taken,  $500,000  of  additional  shares.  Durant  obtained  an 
agreement  from  Hoxie  providing  that  his  contract  should 
be  assigned  to  Durant,  or  to  whomever  he  might  designate. 
He  then  organized  a  partnership  from  among  the  leading 
shareholders  of  the  railroad,  and  obtained  a  subscription 
of  $1,600,000,  upon  which  twenty-five  per  cent,  was  paid 
in  cash.  By  this  arrangement  the  subscribers  were  to 
share  in  the  profits  of  the  Hoxie  contract;  but  becoming 
alarmed  at  the  magnitude  of  the  task  and  the  unlimited 
nature  of  their  liability,  they  did  not  respond  to  the 
6  65 


RAILROAD  FINANCE 

second  assessment.  Durant  thereupon  produced  the  char- 
ter for  the  Credit  Mobilier,  which  he  had  already  procured 
for  such  an  emergency. 

This  charter  was  one  which  had  been  granted  by  Penn- 
sylvania in  1859  for  the  "Pennsylvania  Fiscal  Agenc3^"^^ 
It  was  essentially  a  thing  to  sell,  for  its  terms  were  so 
elastic  that  they  could  be  applied  to  almost  any  sort  of 
financial  operation.  Most  important  of  all,  it  provided 
that  the  liability  of  shareholders  should  be  limited  to  full 
payment  of  their  original  subscription.  Soon  after  this 
transaction,  the  corporate  name  was  changed  to  the 
"Credit  Mobilier  of  America."-^ 

The  members  of  Durant 's  construction  company  were 
given  shares  in  the  Credit  ]\Iobilier  to  represent  their 
advances  on  account  of  the  work;  and  the  holders  of  the 
$2,180,000  of  Union  Pacific  shanes  were  allowed  the  option 
to  take  Credit  Mobilier  shares  for  the  amounts  they  had 
paid  in,  or  to  sell  their  shares  to  the  Credit  Mobilier  or 
back  to  the  Union  Pacific.  The  shareholders  in  the  two 
companies  thus  became  identical,  though  they  might  hold 
different  amounts.  This  was  in  March,  1865.  At  about 
the  same  time,  New  England  capital  w^as  attracted,  and 
the  available  resources  thereby  increased  to  $2,500,000. 

Under  this  arrangement  the  Credit  INIobilier  completed 
the  Hoxie  contract  in  October,  1866.  West  of  the  one- 
hundredth  meridian,  work  was  continued  by  the  Credit 
Mobilier  without  reference  to  any  contract  until  138  miles 
had  been  completed  in  this  manner.  Meanwhile,  two  fac- 
tions had  arisen  in  the  Credit  Mobilier.  Durant  and  his 
followers  professed  to  have  little  confidence  in  the  ultimate 
success  of  the  railroad  as  an  investment,  and  they  there- 
fore proposed  to  derive  all  possible  profits  from  its  con- 
struction.    The  other   party,   at  the   head   of  which   was 

28  L.  I860,  appx.,  no.  715. 
2u  L,    18G4,  no.  90. 

66 


FINANCES  OF  CONSTRUCTION 

Cakes  Ames,  was  made  up  of  New  England  capitalists  who 
favored  the  building  of  a  substantial  road,  but  had 
no  compunctions  about  exacting  all  profits  consistent  with 
the  attainment  of  that  object.  Durant  was  ousted  from 
the  presidency  of  the  Credit  Mobilier,  but  he  was  able 
to  retain  his  office  as  vice-president  of  the  Union 
Pacific.  Sidney  Dillon  became  president  of  the  Credit 
]\fobilier,  and  Ames  was  elected  head  of  the  railroad 
company.  Durant 's  influence  was  still  sufficiently  strong, 
however,  to  prevent  further  contracts  with  the  Credit  Mo- 
bilier. 

A  compromise  was  finally  effected  bj^  which  a  contract 
was  taken  by  Ames,  who  agreed  to  assign  it  to  seven  trus- 
tees for  the  benefit  of  those  who  at  that  time  were  share- 
holders in  the  Credit  Mobilier.  This  contract  was  for  667 
miles  of  road  west  of  the  one-hundredth  meridian,  thus 
including  the  mileage  which  had  already  been  constructed 
by  the  Credit  Mobilier  in  excess  of  that  which  had  been 
included  in  a  contract.  In  order  to  participate  in  the 
profits  of  the  Ames  contract,  the  shareholders  of  the 
Credit  Mobilier  were  required  to  execute  irrevocable 
proxies  to  the  trustees,  empowering  them  to  vote  upon  at 
least  six-tenths  of  all  Union  Pacific  share  capital.  To 
make  the  contract  of  the  trustees  absolute,  the  written 
consent  of  every  shareholder  of  the  Union  Pacific  was  also 
obtained.  After  this  "tri-partite  agreement"  became 
effective  in  October,  1867,  the  Credit  Mobilier  as  a  corpo- 
ration had  no  further  relation  with  the  construction  of 
the  railroad. 

Under  the  direction  of  the  trustees,  among  whom  were 
Ames,  Durant,  and  the  other  leading  shareholders  in  both 
companies,  the  work  was  completed.  When  the  Ames 
contract  expired,  another  similar  in  terms  was  made  for 
the  remaining  125  miles,  and  assigned  in  the  same  manner, 
though  it  was  not  made  directly  with  Ames. 

67 


RAILROAD  FINANCE 

As  the  work  progressed  the  Union  Pacific  turned  over, 
first  to  the  Credit  Mobilier  and  afterwards  to  the  trus- 
tees, the  subsidy  bonds  of  the  United  States  and  the  securi- 
ties of  the  railroad.  The  charter  provided  that  shares 
should  be  sold  only  for  cash,  and  that  neither  shares  nor 
bonds  should  be  sold  below  par.  Little  cash  was  ever 
paid  in,  however.  The  Union  Pacific  would  give  its 
check  in  payment  for  construction,  and  the  same  check 
would  be  immediately  returned  in  payment  for  shares. 
This  was  considered  a  *'eash"  transaction,  and  as  such 
was  entered  upon  the  books  of  account.  The  shares  were 
then  sold  for  as  low  as  thirty  cents  on  the  dollar,  and  the 
proceeds  applied  to  further  construction.  The  surplus  of 
securities  and  money  was  divided  among  the  shareholders 
of  the  Credit  Mobilier. 

At  the  time  when  the  contest  for  control  of  the  Credit 
Mobilier  was  at  its  height,  one  of  the  Durant  faction 
wrote  an  informing  letter  to  a  member  of  congress  whose 
reputation  was  such  as  to  give  him  the  name  of  "watch 
dog  of  the  treasury."  This  was  mailed,  and  Ames  noti- 
fied. An  agreement  was  immediately  effected,  and  the 
letter  was  recovered  from  the  mails.  This  incident 
brought  to  the  minds  of  all  concerned,  a  realization  of  the 
fact  that  a  congressional  investigation  would  expose  the 
methods  by  which  the  law  was  being  evaded,  and  result  in 
shutting  off  the  subsidy  payments,  and  thus  ruin  the  whole 
enterprise.  The  parties  were  therefore  forced  to  agree 
upon  a  course  of  action.  To  Ames,  who  represented  a 
Massachusetts  district  in  congress,  w^as  given  a  number  of 
Credit  Mobilier  shares  to  place  at  par  among  the  in- 
fluential members  of  congress  in  order  that  they  might 
have  a  more  active  interest  in  the  support  of  the  venture. 
Already  bills  had  been  introduced  which  threatened  to 
regulate  the  charges  upon  the  road,  and  it  was  with  the 
idea  of  protecting  the  undertaking  from  what  he  consid- 

68 


FINANCES  OF  CONSTRUCTION 

ered  confiscatory  attacks,  rather  than  to  obtain  beneficial 
legislation,  that  Ames  set  out  to  place  the  shares  where 
they  would  "do  most  good,"  as  he  explained  in  a  letter 
written  at  the  time.  "We  want  more  friends  in  this  Con- 
gress," he  said,  "and  if  a  man  will  look  into  the  law  (and 
it  is  difficult  for  them  to  do  it  unless  they  have  an  in- 
terest to  do  so)  he  can  not  help  being  convinced  that  we 
should  not  be  interfered  with." 

This  expresses  very  clearly  the  attitude  of  Ames  in  the 
matter.  It  seems  that  he  had  no  intention  of  bribing  any- 
one; for  the  shares  were  to  be  paid  for  in  cash  (or  in 
dividends).  He  employed  none  of  the  methods  which  are 
customary  in  conducting  bribing  operations.  The  charac- 
teristics of  the  method  which  ultimately  brought  its  users 
into  disrepute  was  failure  to  recognize  that  one  party  to 
the  transaction  was  a  trustee  for  the  public ;  a  trustee  who 
theretofore  had  not  been  held  very  strictly  to  account,  but 
one  on  whom  increasing  demands  were  being  made. 
Ames'  expulsion  from  congress  has  singled  him  out  for  a 
larger  share  of  popular  condemnation  than  was  his  deserts, 
but  the  attitude  of  Ames  and  his  associates  toward  public 
officials  was  one  which  had  been  winked  at  and  condoned 
for  decades  by  a  public  that  now  demanded  a  sacrifice. 
But  however  much  may  be  said  in  his  favor,  as  the  man  to 
whose  efforts  the  success  of  the  great  task  is  mainly  due; 
the  sober  judgment  of  the  people  was  then  and  since  that 
time  has  been  in  full  accord  with  the  opinion  expressed 
by  the  late  Senator  Hoar,  who  said: 

He  and  his  associates  in  the  Union  Pacific  railroad  seemed  in 
this  matter  to  be  utterly  destitute  of  any  sense  of  public  duty  or 
comprehension  of  the  great  purposes  of  Congress.  They  seemed 
to  treat  it  as  a  purely  private  transaction,  out  of  which  they 
might  get  all  the  money  they  could,  without  any  obligation  to 
carry  out  the  act  according  to  its  letter,  if  they  could  only  do 
so   without  being  detected.     They  seemed  to  have   thought  that 

69 


RAILROAD  FINANCE 

they  were  the  sole  owners  of  the  Union  Pacific  raili'oad  and  of 
the  Credit  Mobilier  corporation,  and  that  the  transaction  between 
the  two  concerned  themselves  only  and  not  the  public.  .  .  . 
The  managers  of  the  Union  Pacific  railroad  .  .  .  made  a 
contract  with  the  Credit  Mobilier  Company  to  construct  the  road 
at  a  price  which  would  exhaust  all  the  resources  of  the  road  in- 
cluding the  proceeds  of  the  bonds  of  all  kiTids,  and  divided  the 
proceeds  among  themselves  as  dividends  on  the  stock  of  the  Credit 
Mobilier.  This  left  the  Union  Pacific  railroad  to  begin  business 
mortgaged  to  its  full  value  without  any  resources  for  its  operation, 
and  utterly  stripi)ed  of  the  ample  endowment  which  the  bounty 
of  the  Government  had  provided  for  it.^o 

Construction  of  the  California  Line?. — The  profits  from 
the  construction  of  the  Union  Pacific  were  distributed 
among  all  who  held  shares  in  the  enterprise ;  in  the  ea.se 
of  the  Central  Pacific  they  were  diverted  to  an  inside 
group  composed  of  Collis  P.  Huntington,  Leland  Stanford, 
Mark  Hopkins,  and  Charles  Crocker.  AYith  the  exception 
of  the  first  section  of  thirty-one  miles  east  of  Sacramento, 
which  was  built  by  small  contractors,  the  work  as  far  as 
the  Nevada  line  was  performed  under  contracts  given  to 
"C.  Crocker  and  company."  Crocker  resigned  from  the 
railroad  directorate  to  take  these  contracts,  and  his  place 
was  filled  by  his  brother.  It  has  been  claimed  that  he 
had  no  partners  in  this  undertaking,  but  there  is  good 
reason  to  believe  from  the  evidence  that  at  all  times  the 
four  principals  were  equally  interested  in  the  results  of 
the  contracts;  that  the  sole  proprietorship  was  a  fiction 
more  or  less  carefully  guarded  to  avoid  successful  attack 
in  the  courts  of  law,  but  nevertheless  a  fiction.  "When  the 
"Contract  and  Finance  company"  was  organized  to  take 
up  the  w^ork  across  Nevada  and  eastward  to  a  junction 
with  the  Union  Pacific,  the  resources  of  C.  Crocker  and 
company  were  turned  over  for  the  benefit  of  the  new  com- 
pany.    The    Contract    and    Finance    company    also   built 

30  Hoar,  "Autobiography,"  I,  315,  320, 

70 


FINANCES  OF  CONSTRUCTION 

parts  of  the  Western  Pacific  railroad  and  of  the  California 
and  Oregon.  It  was  dissolved  in  1874,  and  its  assets  were 
divided  among  the  four  members.  As  a  necessary  precau- 
tion against  disturbing  intrusion  or  attack,  its  books  were 
afterwards  destroyed.  The  "Western  Development  com- 
pany" was  next  organized  to  build  parts  of  the  California 
and  Oregon  and  of  the  Southern  Pacific.  It  was  followed 
by  the  "Pacific  Improvement  company."  This  company 
not  only  took  large  construction  contracts,  but  it  also  held 
valuable  property  which  was  necessary  for  the  proper 
operation  of  the  railroad.  It  owned  the  bridge  over  the 
Colorado  river  at  Yuma,  the  great  ferryboat  which  took 
the  place  of  a  bridge  across  the  strait  of  Carquinez,  station 
buildings  at  Los  Angeles  and  Sacramento,  coal  mines  in 
Washington  and  Mexico,  piers  at  Santa  IMoniea  and  San 
Pedro,  and  water  front  lands  at  Berkeley  and  Oakland. 
It  also  controlled  the  Pacific  Mail  Steamship  company,  and 
the  street  railroads  in  San  Francisco  and  Oakland,  and  it 
owned  steamers  operating  upon  the  Sacramento  river  and 
San  Francisco  bay.  Through  this  company — which  is  still 
in  existence,  though  possessed  of  little  of  this  property — 
the  railroad  was  made  to  contribute  generously  to  the  pri- 
vate fortunes  of  the  men  who  held  control.-''^ 

System  Responsible  for  Inferior  Work  and  Over-con- 
struction.— So  long  as  an  inside  company  was  charged 
with  the  work,  there  was  small  chance  of  reaching  a  high 
standard  of  construction.  The  motive  was  profit  and  not 
etlficiency.  This  resulted  in  loss  to  the  shareholders  through 
the  diversion  of  earnings  for  immediate  reconstruction  of 
the  road.  The  greatest  public  evil  resulting  from  the  sys- 
tem, however,  was  undoubtedly  the  building  of  mileage  in 
excess  of  the  needs  of  the  country,  and  often  in  sections 
where  there  was  little  prospect  of  there  ever  being  a  paying 
traffic.     Siicli    a    misapplication   of   capital   had   its  place 

31  Pacific   l^iihvav   CommiHsion,   Ri'port,  69-82. 

71 


RAILROAD  FINANCE 

among  causes  of  the  several  financial  panics  that  followed. 

As  in  other  cases  where  the  requirements  of  business 
morality  and  public  welfare  have  been  openly  violated  by 
common  consent  for  the  accomplishment  of  a  temporary 
useful  purpose,  the  immediate  end  having  been  accom- 
plished, the  vicious  aspects  of  the  method  of  necessity  dis- 
appear. The  acts  of  some  hapless  individual  may  be  made 
the  text  for  a  campaign  of  popular  education  which  makes 
impossible  a  return  to  previous  practice,  but  the  adjust- 
ment once  made  comes  to  stay. 

Notwithstanding  the  unnecessary  mileage  which  has 
been  built  in  certain  sections,  the  country  has  continued 
to  call  for  additional  transportation  facilities.  Construc- 
tion companies  are  still  organized  for  the  purpose,  but 
their  affairs  are  conducted  in  a  manner  to  make  them  the 
subject  of  less  adverse  criticism. 

CONSTRUCTION   OF   EXTENSIONS 

Railroads  Usually  Built  in  Sections. — Few  railroads  of 
any  considerable  mileage  have  been  constructed  by  a  single 
corporation.  For  this  fact  several  causes  are  responsible. 
The  earliest  lines  were  designed  for  local  needs,  and  the 
first  trunk  lines  were  merely  consolidations  of  a  number  of 
local  segments  for  the  accommodation  of  through  business. 
The  security  attaching  to  the  bonds  of  these  early  roads 
was  never  of  the  best,  and  in  order  that  it  might  be  made 
as  strong  as  possible,  a  provision  was  usually  inserted  in 
the  mortgage  which  would  automatically  extend  the  lien 
to  any  property  thereafter  acquired.  For  this  reason, 
when  a  company  having  such  bonds  wished  to  extend  its 
mileage,  it  found  itself  able  to  raise  funds  only  through 
the  sale  of  second  mortgage  bonds  or  capital  shares.  As 
neither  was  in  great  demand,  it  was  necessary  in  some  way 
to  evade  the  restriction  of  the  first  mortgage.  This  conld 
be  best  done  by  forming  a  separate  corporation,  the  bonds 

72 


FINANCES  OF  CONSTRUCTION 

of  which  might  be  secured  by  a  first  lien  upon  the  addi- 
tional mileage.  Independent,  however,  of  the  handicap 
of  the  after-acquired  property  clause,  it  has  been  generally 
found  to  be  poor  policy  for  a  railroad  to  build  long  exten- 
sions into  undeveloped  territory  when  by  means  of  a  sub- 
sidiary corporation  it  can  advance  large  sums  toward  the 
construction  of  additional  mileage  without  endangering  its 
own  credit.  "With  the  endorsement  of  the  parent  com- 
pany, such  bonds  may  be  made  acceptable  to  investors. 

Endorsement  of  Bonds  hy  Parent  Company. — In  defer- 
ence to  popular  hostility  toward  large  corporations,  it  was 
the  original  policy  of  the  Pennsylvania  railroad  to  confine 
itself  to  the  state  of  Pennsylvania,  and  to  reach  Western 
traffic  by  assisting  in  the  construction  of  connecting  lines 
under  contracts  for  the  interchange  of  traffic.  Thus  the 
Ohio  and  Pennsylvania,  the  Ohio  and  Indiana,  the  Fort 
Wayne  and  Chicago,  the  Marietta  and  Cincinnati,  and  the 
Steubenville  and  Indiana  were  aided  through  large  share 
subscriptions,  and  the  Philadelphia  and  Erie  and  the 
Grand  Rapids  and  Indiana,  by  the  endorsement  of  bonds. 
In  addition  to  its  endorsement,  the  Pennsylvania  took 
$3,800,000,  or  over  three-fourths  of  the  entire  issue,  of  the 
Philadelphia  and  Erie  bonds,  and  thus  provided  funds  for 
the  construction  of  the  road.  Other  lines  followed  a  simi- 
lar practice;  the  Baltimore  and  Ohio  subscribed  $1,000,000 
to  the  bonds  of  the  Pittsburgh  and  Connellsville,  and  the 
New  York,  Lake  Erie,  and  Western  advanced  large  sums 
to  aid  the  construction  of  the  Chicago  and  Atlantic. 

Collateral  Trust  Bonds. — Collateral  trust  bonds  have 
served  as  an  effective  aid  in  the  financing  of  extensions  and 
branches;  for  after  the  securities  of  the  subsidiary  lines 
have  been  received  in  exchange  for  construction  advances, 
they  may  be  deposited  as  security  for  an  issue  of  collateral 
trust  bonds,  and  the  sums  advanced  thus  restored  to  the 
treasury.     This  practice  has  been  followed  by  the  Illinois 

73 


RAILROAD  FINANCE 

Central.  Such  bonds  have  also  been  issued  directly  in  ex- 
change for  the  securities  of  extension  lines.  The  Chicago, 
Rock  Island,  and  Pacific  in  this  manner  financed  the  con- 
struction of  the  AVisconsin,  Minnesota,  and  Pacific,  the  Chi- 
cago, Kansas,  and  Nebraska,  and  the  St.  Joseph  and  Iowa. 
By  this  method,  which  has  also  been  adopted  by  the  Union 
Pacific,  the  Atchison,  and  other  representative  railroads, 
the  treasury  of  the  parent  company  is  protected,  for  the 
cash  payments  are  limited  to  the  amount  required  for  in- 
terest upon  the  bonds.  Y/hichever  plan  is  followed,  the 
necessary  funds  may  be  raised  more  readily  because  of  the 
desire  of  the  investor  to  own  a  security,  whatever  its  na- 
ture, for  which  an  established  company  is  responsible. 

Moderii  Construction  Methods  Illustrated. — The  Chicago 
and  North  Western  is  a  type  of  railroad  system  which 
has  been  to  a  large  extent  built  up  by  means  of  subsidiary 
companies.  Whenever  an  extension  has  been  completed 
by  one  of  these  companies  according  to  the  terms  of  the 
lease  which  is  entered  into  before  the  beginning  of  construc- 
tion, the  parent  company  has  furnished  the  equipment  and 
operated  the  new  lines  subject  to  the  provisions  of  that 
agreement.  When  the  Chicago,  Burlington,  and  Quincy 
reached  the  Mississippi  river,  its  directors  were  unwilling 
to  assume  the  risk  of  building  into  Iowa.  Thoy  decided, 
therefore,  to  form  a  new  company,  to  the  shares  of  which 
the  shareholders  of  the  parent  company  w^ould  be  asked  to 
subscribe.  The  Burlington  and  Missouri  River  railroad 
was  accordingly  organized  with  practically  the  same  board 
of  directors,  and  with  many  of  the  old  shareholders.  An 
agreement  was  entered  into  with  this  company,  providing 
that  the  Chicago,  Burlington,  and  Quincy  should  set  apart 
half  of  the  gross  earnings  on  exchanged  traffic  as  a  fund 
for  the  purchase  of  securities  of  the  new  company.  This 
resulted  in  transferring  the  title  from  the  Chicago,  Bur- 
lington, and  Quincy  shareholders  to  the  corporation  itself. 

7-i 


FINANCES  OF  CONSTRUCTION 

]\Ieanwlnle  the  new  road  was  operated  under  a  lease.  Sim- 
ilar methods  were  adopted  in  the  construction  of  the  Bur- 
lington and  Missouri  River  railroad  of  Nebraska  and  the 
Chicago,  Burlington,  and  Northern.  Both  the  North  West- 
ern and  the  Burlington  have  generally  built  their  exten- 
sions without  the  intervention  of  construction  companies, 
and  provided  capital  for  the  payment  of  contractors  out 
of  the  ])roceeds  of  bonds.  It  is  the  settled  policy  of  the 
Great  Northern  to  build  extensions  upon  the  credit  of  the 
completed  portions  of  the  road.  Advances  are  made  to  an 
extension  company  from  the  surplus  or  from  a  fund  ob- 
tained by  selling  Great  Northern  shares  at  par.  Upon  the 
completion  of  the  new  line,  its  shares  are  turned  over  to 
the  Great  Northern  at  par  in  payment  of  the  original  loan. 
Thus  the  Great  Northern  becomes  owner  of  the  road,  the 
share  capital  of  which  represents  its  cost.  The  At- 
chison, Topeka,  and  Santa  Fe  began  as  a  short  line  between 
two  towns  in  Kansas.  The  system  is  now  an  aggregation  of 
lines  built  by  separate  corporate  organizations,  but  con- 
trolled by  owners  of  shares  representing  advances  for  con- 
struction. Many  of  these  subsidiary  lines  are  nominally 
leased,  the  rental  usually  amounting  to  the  interest  upon 
the  bonds.  The  company  reaches  the  Pacific  coast  over  a 
succession  of  lines,  some  of  which  were  first  organized  by 
local  capitalists  so  that  the  identity  of  the  controlling  forces 
need  be  disclosed  only  after  a  firm  position  had  been  estab- 
lished. 

The  Western  Pacific. — The  Western  Pacific  railway  is  a 
subsidiary  line  of  the  Denver  and  Rio  Grande  system, 
projected  to  provide  the  Gould  lines  with  an  outlet  to  the 
Pacific  coast.  To  provide  for  its  construction  the  Denver 
and  Rio  Grande,  itself  and  with  the  Rio  Grande  Western, 
took  the  entire  issue  of  $50,000,000  first  mortgage  bonds 
— which  were  underwritten  at  ninety — receiving  as  a  bonus 
an  equal  amount  of  shares,  which  amounted  to  two-thirds 

75 


RAILROAD  FINANCE 

of  the  total.  If  the  proceeds  of  these  bonds  should  prove 
'nsuffieient  to  construct  the  railroad  and  necessary  ter- 
ininals  and  to  purchase  at  least  $3,000,000  worth  of  equip- 
ment, the  Rio  Grande  Western  agreed  to  make  up  the  de- 
ficit, taking  in  exchange  for  its  advances  second  mortgage 
bonds,  of  which  $25,000,000  were  issued.  As  inferior 
bonds  could  not  be  sold,  an  issue  of  $10,000,000  of  short 
term  notes  was  made  in  1908.  Until  the  completion  of  the 
main  line,  interest  amounting  to  $7,500,000  was  charged 
to  construction,  but  with  the  beginning  of  operations  the 
Denver  and  Rio  Grande  guaranteed  the  interest  payments 
under  the  first  mortgage.  The  Rio  Grande  Western  has 
since  been  merged  in  the  Denver  and  Rio  Grande. 

As  was  the  case  with  the  Atchison,  the  Western  Pacific 
was  compelled  to  conduct  its  preliminary  negotiations  in 
California  through  local  capitalists.  The  first  step  was  the 
organization  of  the  Stockton  and  Beckwourth  Pass  and  the 
Sacramento  and  Oakland  railroads,  and  the  San  Francisco 
Terminal  Railway  and  Ferry  company  in  1903.  It  was 
not  until  1905  that  the  Western  Pacific  took  over  these 
companies,  and  disclosed  the  forces  interested  in  the  under- 
taking. 

The  St.  Paul  Extension. — In  the  financing  of  the  Chi- 
cago, Milwaukee,  and  St.  Paul  extension  to  the  Pacific 
coast,  entirely  different  methods  were  employed.  In  1906 
the  company  offered  its  shareholders  the  privilege  of  sub- 
scribing at  par  to  $100,000,000  of  new  shares,  the  final  in- 
stallment on  which  became  due  in  March,  1909.  Out  of 
the  capital  obtained  in  this  manner,  it  was  estimated  that 
the  line  could  be  built  and  equipped,  and  construction  ad- 
vances out  of  earnings  returned  to  the  treasury.  Interest 
was  paid  upon  installments  toward  the  purchase  of  the  new 
shares  and  included  as  a  part  of  the  cost  of  construction. 
With  the  payment  of  the  final  installment  the  new  shares 
were  put  upon  a  dividend  basis,  but  by  that  time  the  line 

76 


FINANCES  OF  CONSTRUCTION 

^vas  nearly  ready  for  operation.  By  this  method  the  old 
shareholders  were  protected  against  immediate  loss  from  re- 
duction of  dividends  occasioned  by  the  work  of  construction. 
In  INtay,  1909,  a  mortgage  was  filed  to  secure  an  authorized 
issue  of  $100,000,000  of  bonds,  and  in  June  of  that  year 
$25,000,000  of  four  per  cent,  debentures,  or  half  the 
amount  authorized,  were  issued  to  provide  for  branch  lines 
and  feeders.  As  has  been  the  general  custom,  constnic- 
tion  was  carried  out  through  subsidiary  companies.  Thus 
the  entrance  into  Seattle  was  effected  by  means  of  the  Co- 
lumbia and  Puget  Sound  railroad ;  and  in  Idaho,  Montana, 
and  South  Dakota  were  chartered  corporations  bearing  the 
name  of  the  parent  company.  The  extension  is  now 
known  as  the  Chicago,  Milwaukee,  and  Puget  Sound  rail- 
way. 

CONSTRUCTION  OF  SPECIAL  STRUCTURES 

Bridges. — While  the  courts  have  held  that  a  bridge  be- 
comes a  fixture  of  a  railroad,  and  that  therefore  a  condi- 
tional sale  of  such  property  cannot  be  held  valid  as  against 
general  raortgagees,^^  there  has  been  no  attempt  to  challenge 
the  lien  of  the  holders  of  bonds  issued  by  a  railroad  com- 
pany and  secured  upon  a  bridge  built  out  of  the  proceeds 
of  the  loan.  Thus  the  International  and  Great  Northern 
railroad  in  1880  issued  $225,000  of  forty-year  bonds  to  pro- 
vide for  a  bridge  over  the  Colorado  river  near  Austin. 
These  bonds  are  subject  to  a  sinking  fund  provision  re- 
quiring that  $2000  shall  be  applied  annually  to  the  pur- 
chase of  the  bonds  at  110;  if  bonds  are  not  obtainable  at 
that  price,  the  money  is  to  be  invested  in  other  first  mort- 
gage bonds  to  yield  four  per  cent.  Similar  bonds  were 
issued  by  the  Newport  and  Cincinnati  Bridge  company 
upon  the  bridge  over  the  Ohio  river  between  the  above 
named  cities. 

A  more  common  practice  is  to  put  out  bonds  through 

32  Porter  V.  Pittsburgh  Bessemer  Steel  Company,  122  U.  S.,  267. 

77 


RAILROAD  FINANCE 

the  medium  of  a  subsidiary  bridge  company.  Such  bonds 
are  usually  guaranteed  by  the  railroad  company  and  re- 
deemed through  a  sinking  fund.  The  St.  Louis  and  San 
Francisco  railroad  in  this  manner  provided  for  the  bridge 
over  the  ]\Iississippi  river  at  JNIemphis  through  the  Kansas 
City  and  Memphis  Railway  and  Bridge  company ;  the 
Louisville  and  Nashville  railroad,  for  a  bridge  over  the 
Ohio,  through  the  Henderson  Bridge  and  Railroad  com- 
pany; and  the  Missouri,  Kansas,  and  Texas  for  a  bridge 
over  the  ]\Iissouri  river,  through  the  Boonviile  Bridge 
company.  In  some  eases  a  number  of  railroad  companies 
have  joined  in  the  construction  of  a  bridge  for  common  use. 
Thus  the  Chicago  and  Eastern  Illinois,  the  Illinois  Central, 
the  St.  Louis,  Iron  Mountain,  and  Southern,  the  Missouri 
Pacific,  and  the  St.  Louis  and  Southwestern  railroads 
financed  the  construction  of  the  Thebes  bridge  over  the 
Mississippi  river  through  the  Southern  Illinois  and  IMis- 
souri  Bridge  company.  Similarly  the  Michigan  Central 
tunnel  under  the  Detroit  river  was  constructed  from  the 
proceeds  of  an  issue  of  Detroit  River  Tunnel  company 
bonds,  secured  upon  the  completed  property. 

Terminals. — Terminal  facilities,  whether  passenger  sta- 
tions, piers,  or  warehouses,  require  immense  expenditures 
for  sites  and  construction  work.  The  early  railroads  were 
able  to  obtain  lands  for  this  purpose  as  a  gift  or  at  nomi- 
nal cost,  but  the  growth  of  business  has  created  a  constant 
demand  for  enlarged  buildings  and  yards,  requiring  a 
great  outlay  of  capital.  When  a  railroad  now  tries  to 
effect  an  independent  entrance  into  a  large  city,  the  cost  is 
so  great  as  to  be  prohibitive  except  for  the  strongest  com- 
panies. Thus  the  Grand  Central  Terminal  site  in  New 
York,  which  was  obtained  at  small  expense  by  the  New 
York  and  Harlem  railroad,  has  long  been  in  control  of  the 
New  York  Central ;  but  while  its  possession  has  proved  of 
inestimable  strategic  value,  the  demands  of  a  constantly 

78 


FINANCES  OF  CONSTRUCTION 

increasing  volume  of  traffic  have  necessitated  entire  recon- 
struction. And  the  Pennsylvania  Terminal  in  New  York 
has  absorbed  a  great  amount  of  capital  for  the  site,  tun- 
nels, and  building.  Such  outlays  may  be  justified  in  the 
light  of  the  experience  of  the  West  Shore  and  of  the  Erie, 
which  demonstrated  the  necessity  for  a  direct  entrance  into 
a  large  city.  The  fate  of  the  New  York  and  New  England 
showed  the  folly  of  depending  upon  the  facilities  of  a 
natural  rival  for  this  purpose. 

Terminals  may  be  financed  out  of  a  direct  addition  to 
the  general  securities  of  a  railroad,  but  the  more  common 
method  is  to  issue  bonds  secured  by  a  specific  lien  upon  the 
property,  either  by  the  railroad  company  itself  or  by  a  sub- 
sidiary terminal  company.  The  Pittsburg,  Fort  Wayne, 
and  Chicago  railway  in  1860  obtained  a  site  in  Chicago  by 
means  of  an  issue  of  "Chicago  depot"  bonds.  The  Wa- 
bash railroad  has  outstanding  an  issue  of  bonds  secured 
upon  terminal  properties  in  St.  Louis,  Kansas  City, 
Omaha,  Chicago,  Quincy,  Toledo,  and  Detroit.  Other  ex- 
amples are:  the  Reading  company's  terminal  bonds,  which 
are  secured  on  certain  terminals  in  Philadelphia,  and  the 
Louisville  and  Nashville's  "St.  Louis  property"  bonds. 

The  same  reasons  which  have  caused  railroad  companies 
to  finance  the  building  of  bridges  through  securities  issued 
under  other  names  have  prompted  the  construction  of  ter- 
minals by  means  of  subsidiary  corporations  formed  for  that 
specific  purpose  and  controlled  by  the  railroad  compan3^ 
The  Philadelphia  and  Reading  enters  Philadelphia  over 
the  property  of  the  Philadelphia  and  Reading  Terminal 
railroad  company.  The  terminals  used  by  the  Louisville 
and  Nashville  are  owned  by  a  company  in  which  it  is  joint 
owner;  the  freight  terminals  of  the  Atchison,  Topeka, 
and  Santa  Fe  at  San  Francisco,  by  the  Santa  Fe  Terminal 
company;  and  the  docks  used  by  the  ]\Iobile  and  Ohio  rail- 
road on  the  jMobile  river,  by  the  Mobile  Dock  company. 

79 


RAILROAD  FINANCE 

Joint  ownership  of  terminal  property  is  a  natural  con- 
sequence of  the  great  expense  attaching  to  independent 
entrance  into  a  large  city.  The  St.  Paul  Union  Depot 
company  share  capital  is  owned  by  the  nine  different  rail- 
roads which  enter  St.  Paul.  Other  examples  are  the  New 
Orleans  Terminal  company,  owned  jointly  by  the  Southern 
and  St.  Louis  and  San  Francisco  railroads,  and  the 
Northern  Terminal  company  of  Portland,  which  is  owned 
by  the  Southern  Pacific  and  the  Northern  Pacific.  The 
Terminal  Railroad  Association  of  St.  Louis  is  controlled  by 
fourteen  railroad  companies.  It  owns  the  Union  Depot 
company  property  at  St.  Louis,  and  leases  the  St.  Louis 
Bridge  and  Tunnel,  and  also  the  St.  Louis  Belt  and  Ter- 
minal railway. 


CHAPTER  V 

FINANCING  EQUIPMENT 

Definition. — As  defined  by  the  interstate  commerce  com- 
mission, equipment  includes  steam  and  electric  locomo- 
tives, passenger  and  freight  cars,  work  cars,  machinery 
and  tools  for  construction  and  repair,  and  ferryboats, 
tugs,  and  other  floating  properties.  Here  the  discussion 
will  be  concerned  principally  with  the  rolling  stock  used 
in  the  handling  of  revenue  traffic.  Cost  of  equipment  will 
be  taken  to  mean  the  net  amount  of  outlay  either  on  ac- 
count of  manufacture  or  under  contract. 

Cash  Purchase  and  Manufacture  in  Railroad  Shops. — 
The  early  local  railroads,  particularly  those  on  the  Atlan- 
tic seaboard  which  obtained  construction  funds  by  sales 
of  shares,  provided  for  equipment  in  the  same  manner  as 
for  construction.  After  completing  the  roadbed,  they  en- 
tered into  another  contract  for  rails,  and  then  procured 
equipment  through  a  contract  with  the  manufacturers. 
Additional  equipment,  they  built  in  their  own  shops,  for 
there  were  no  large  establishments  capable  of  supplying 
the  wants  of  the  rapidly  increasing  number  of  railroads. 
Some  of  the  older  companies  still  operate  extensive  manu- 
facturing plants,  but  none  attempt  to  supply  all  their  own 
requirements.  The  business  has  become  concentrated  in 
great  industrial  corporations  like  the  American  Car  and 
Foundry  company,  the  Baldwin  Locomotive  Works,  and 
the  American  Locomotive  company,  which  are  able  to  fill 
orders  for  almost  any  amount  of  equipment.^  The  car 
builder  of  to-day,  however,  may  be  said  to  be  merely  an 

1  Moody,  "The  Great  Railroad  Equipment  Combinationa,"  Moody's 
Mag.,  VII,  247-57. 

7  81 


RAILROAD  FINANCE 

assembler;  for  each  master  mechanic  has  his  oAvn  ideas  as 
to  patterns  and  materials.  Consequently,  when  a  railroad 
enters  the  market  for  new  equipment,  it  orders  the  parts 
from  the  foundry,  and  the  car  builder  puts  these  parts  to- 
gether and  delivers  the  finished  equipment  to  the  railroad. 

Purchase  With  Proceeds  of  Bonds. — Whatever  the  origi- 
nal basis  of  financing,  necessity  sooner  or  later  compelled 
the  early  railroad  financiers  to  provide  for  purchase  of 
equipment  out  of  the  proceeds  of  bonds.  These  bonds  were 
usually  secured  by  a  general  mortgage  covering  the  entire 
property  of  the  company.  It  therefore  became  necessary 
either  to  reserve  a  certain  amount  of  bonds  for  further 
purchases  of  equipment,  or  to  resort  to  some  other  method 
which  M'ould  adequately  protect  the  interests  both  of  the 
investor  and  of  the  vendor.  Out  of  this  situation  arose 
the  practice  of  purchasing  equipment  as  it  is  needed,  and 
paying  for  it  from  time  to  time  out  of  earnings. 

Purchase  on  the  Installment  Plan. — A  large  and  steadily 
increasing  amount  of  railroad  equipment  has  therefore 
come  to  be  purchased  under  a  contract  of  conditional  sale. 
This  practice  began  late  in  the  sixties,  when  few  states  re- 
cognized such  a  contract  as  valid  as  against  third  parties, 
and  in  consequence,  the  first  sales  were  conducted  after 
the  manner  of  installment  leases,  with  lease  warrants  to 
represent  the  payments  made  by  the  railroad.^  The 
statutes  now  generally  recognize  the  validity  of  the  condi- 
tional sale,  but  the  fiction  of  the  installment  lease  has  been 
retained  in  a  large  proportion  of  the  equipment  contracts 
which  are  now  in  effect. 

Purchase  Directly  from  Manufacturer  or  Through  a 
Trustee. — A  railroad  may  purchase  equipment  directly 
from  the  manufacturer  under  this  plan,  turning  over  the 
lease  warrants  when  the  equipment  is  received,  and  pay- 

2  As  early  as  1845,  we  are  told,  the  Schuylkill  Navigation  com- 
pany purchased  barges  after  this  plan. — Rawle,  "Car  Trust  Securi- 
ties," Amer.   Bar  Assoc,   Report,  VIII,  322. 

82 


FINANCING  EQUIPMENT 

ing  the  money  directly  to  the  manufacturer  as  the  war- 
rants fall  due.  This  is  frequently  done  to-day,  but  it  is 
usually  to  the  advantage  of  manufacturers  to  induce  the 
investing  public  to  become  creditors  of  the  railroads  in  lieu 
of  themselves.  To  this  end  it  is  customary  to  assign  the 
lease  to  a  trustee  (usually  an  incorporated  trust  company) 
as  collateral  security  for  a  series  of  notes  which  certify 
that  the  holder  is  entitled  to  an  interest  in  the  lease  and 
a  share  in  the  proceeds  of  the  payments  to  be  made  by  the 
railroad  on  its  warrants.  These  notes  are  commonly  known 
as  "car  trust  certificates." 

The  Equipment  or  Car  Trust. — There  is  little  uniformity 
in  the  details  of  car  trust  agreements,  but  it  is  possible 
to  single  out  certain  features  which  are  found  in  most  con- 
tracts of  this  nature.  A  certain  amount  of  cash  is  paid 
by  the  railroad  upon  receiving  the  equipment,  and  addi- 
tional payments  are  made  in  fixed  amounts  and  at  regular 
intervals ;  the  sum  paid  being  sufficient  to  provide  for  ren- 
tals, interest,  and  an  installment  toward  the  purchase 
price.  The  size  of  the  original  cash  payment  is  determined 
by  the  credit  of  the  company  purchasing  the  equipment. 
It  is  usually  ten  or  fifteen  per  cent,  of  the  purchase  price, 
but  it  may  be  as  high  as  twenty-five  per  cent.  Only  a  few 
exceptionally  strong  railroads  have  been  exempt  from  this 
requirement.  When  final  payment  is  made,  title  to  the 
equipment  becomes  vested  in  the  railroad,  but  in  case  of 
default  before  that  time,  the  railroad  forfeits  whatever  it 
may  have  already  paid.  Installments  may  be  paid 
monthly  or  quarterly,  and  sometimes  annually,  but  they 
are  usually  due  semi-annually.  In  most  cases  the  certifi- 
cates are  issued  with  coupons,  but  they  may  be  had  in 
registered  form.  They  are  commonly  guaranteed  by  the 
railroad  company.  The  term  of  the  contract  is  usually 
from  five  to  ten  years;  it  is  rarely  more  than  twelve. 
With  the  advance  in  the  art  of  car  construction  greater 

83 


RAILROAD  FINANCE 

durability  has  been  attained,  so  that  the  tendency  ig  now 
toward  lengthening  the  period.  The  New  York  Central 
equipment  notes  of  1907  are  to  run  fifteen  years.  Car 
trust  contracts  of  this  nature  have  been  entered  into  by  the 
Southern  railway,  the  Chesapeake  and  Ohio,  the  Norfolk 
and  Western,  the  Lehigh  Valley,  and  other  representative 
railroads. 

Adequate  Security  of  Car  Trust  Certificates. — The  se- 
curity of  car  trust  certificates  is  ample,  independent  of 
the  guarantee  of  a  railroad  company.  The  detailed  provi- 
sions of  the  contract  require  the  railroad  to  pay  taxes  on 
the  equipment,  to  keep  it  insured  and  in  repair,  and  to 
restore  any  cars  which  may  be  destroyed.  Frequent  inspec- 
tion of  the  property  must  be  allowed,  and  a  detailed  report 
of  its  condition  must  be  submitted  to  the  trustee  each  year. 
If  new  legislation  should  require  additional  appliances, 
these  must  be  furnished  at  the  expense  of  the  railroad. 
All  equipment  subject  to  the  contract  must  bear  the  name 
of  the  trustee  as  actual  owner.  As  wdth  only  a  few  ex- 
ceptions title  to  all  of  the  equipment  is  retained  by  the 
trustee  until  final  payment  is  made,  the  security  of  each 
outstanding  certificate  becomes  relatively  greater  with 
time.  As  rolling  stock  is  essential  to  the  operation  of  a 
railroad,  even  if  a  company  is  in  the  hands  of  receivers,  it 
will  continue  to  pay  its  car  trust  obligations. 

Forms  of  Car  Trust  Agreements. — There  are  various 
ways  of  forming  car  trusts.  A  railroad  in  need  of  equip- 
ment may  arrange  with  capitalists  to  organize  an  associa- 
tion which  will  purchase  equipment  from  the  manufac- 
turers and  arrange  all  details  for  its  final  transfer.  Or  it 
may  enter  into  preliminary  negotiations  with  the  manufac- 
turers, and  then  obtain  the  co-operation  of  capitalists  who 
form  an  association  and  conduct  the  transaction  in  the 
usual  manner.  Sometimes  a  railroad  'will  contract  directly 
with  the  manufacturers,  but  obtain  the  purchase  money 

84 


FINANCING  EQUIPMENT 

from  capitalists  who  unite  in  a  car  trust  association  and 
take  title  to  the  equipment  pending  final  settlement  of  the 
loan.  Railroads  which  have  manufacturing  plants  of  their 
own  sometimes  build  equipment  in  their  shops  out  of  capi- 
tal furnished  by  a  car  trust  association  under  an  agree- 
ment that  when  completed  the  title  to  the  property  is  to 
pass  to  a  trustee  under  the  terms  of  an  ordinary  car  trust 
lease.  In  rare  instances  a  manufacturer  who  has  con- 
tracted for  the  sale  of  equipment  directly  to  a  railroad,  in 
order  to  obtain  his  money  as  soon  as  possible,  has  de- 
posited the  contract  with  a  trustee  who  has  issued  certifi- 
cates of  participation  in  the  form  of  car  trust  certificates 
bearing  the  endorsement  of  the  manufacturer.  The  Nor- 
folk and  Western  railway  has  obtained  equipment  on  the 
car  trust  plan  through  the  medium  of  the  subsidiary  Vir- 
ginia company,  which  is  primarily  a  land  and  development 
compan^^  Sometimes  an  association  is  organized  to  buy 
equipment,  contract  for  its  sale  to  the  railroad,  execute 
the  deed  of  trust,  and  issue  the  certificates.  Such  associa- 
tions are  joint  stock  companies,  with  capital  stock  repre- 
sented by  shares  or  certificates  in  denominations  of  $1000. 
The  Pennsylvania  railroad  has  several  such  associations 
with  a  fixed  capital,  the  certificates  of  which  are  issued  in 
series  which  are  limited  in  amount  and  secured  by  a  lien 
upon  specific  equipment.  It  is  the  practice  of  the  St. 
Louis,  Iron  Mountain,  and  Southern  to  increase  the  capi- 
tal of  its  associations  as  need  arises  for  more  equipment, 
but  each  series  of  certificates  is  secured  upon  the  particu- 
lar equipment  for  which  it  is  issued. 

There  were  outstanding  on  June  30,  1910,  a  total  of 
$353,341,578  equipment  trust  obligations  of  the  railroads 
of  the  United  States. 

Equipment  Bonds. — As  a  substitute  for  the  note  or 
certificate  put  out  by  a  trust  company  or  a  car  trust 
association,  many  railroads  have  adopted  the  plan  of  issu- 

85 


RAILROAD  FINANCE 

lug  equipment  bonds  as  direct  obligations.  The  deed  of 
trust  securing  these  bonds  may  be  drawn  up  in  the  form 
of  a  lease,  or  what  is  more  frequent,  as  a  simple  contract 
of  conditional  sale.  According  to  this  plan,  title  to  the 
equipment  is  assigned  by  the  manufacturer  to  a  trustee, 
pending  final  settlement  of  the  bonds  by  the  railroad,  and 
secured  upon  the  contract  of  sale.  The  Pennsylvania  rail- 
road has  bonds  of  this  sort  which  are  subject  to  a  sinking 
fund  requirement,  insuring  the  withdrawal  of  the  entire 
amount  before  the  expiration  of  the  twenty-five  years  for 
which  they  were  issued.  The  company  must  pay  over  to 
the  trustee  each  year  an  amount  of  cash  sufficient  to  pur- 
chase five  per  cent,  of  the  issue  at  par  and  accrued  inter- 
est. If  bonds  are  not  obtainable  for  sinking  fund  invest- 
ment at  that  price,  the  money  may  be  expended  for  the 
purchase  of  additional  equipment  to  be  added  to  the  same 
tru.st.  The  Buffalo,  Rochester,  and  Pittsburgh  has  several 
series  of  equipment  bonds  issued  under  the  same  condi- 
tions. It  also  has  one  series  which  is  subject  to  the  provi- 
sion that  if  the  bonds  cannot  be  purchased  at  a  stipulated 
price,  the  trustees  may  draw  a  sufficient  number  by  lot  to 
take  up  the  cash  advanced  by  the  company.  Bonds  so 
drawn  are  to  be  cancelled,  and  the  entire  series  may  be 
redeemed  by  the  company  upon  six  weeks'  notice  at  a  price 
fixed  in  the  mortgage. 

Equipment  Company  Bonds. — Equipment  may  be  pro- 
cured in  this  manner  through  the  medium  of  an  equipment 
company,  which  may  be  organized  for  a  single  contract. 
Such  a  company  will  purchase  the  rolling  stock  or  the  loco- 
motives from  the  manufacturer,  and  contract  to  deliver 
title  to  the  railroad  when  final  payment  is  received.  This 
contract  it  transfers  to  a  trustee  as  collateral  security  for 
the  bonds  which  it  issued  to  represent  the  money  advanced 
for  the  transaction.  These  bonds  are  finally  retired 
through  the  operation  of  a   sinking  fund.     The   Kansas 

86 


FINANCING  EQUIPMENT 

City,  Fort  Scott,  and  Memphis  has  obtained  equipment  in 
this  manner  through  the  Fort  Scott  and  the  Ozark  equip- 
ment companies,  the  bonds  of  which  are  endorsed  by  the 
St.  Louis  and  San  Francisco  railroad  company.  In  each 
case  the  bonds  are  issued  subject  to  the  provision  that  if 
none  are  available  for  the  sinking  fund  at  the  price  stipu- 
lated in  .the  mortgage,  redemption  shall  be  determined  by 
lot,  and  bonds  retired  in  this  manner  are  replaceable  by  re- 
funding bonds  of  the  Kansas  City,  Fort  Scott,  and  Mem- 
phis. The  Pere  IMarquette  has  also  adopted  this  plan  of 
financing  equipment. 

Rental  Contracts. — INTueh  railroad  equipment  was  at  one 
time  leased  from  transportation  and  rolling  stock  com- 
panies under  contracts  providing  for  either  a  per  diem  or 
mileage  rental.  Before  and  after  the  Civil  war  there  were 
organized  a  number  of  fast  freight  lines — "Eed  line," 
"Blue  line,"  "White  line,"  etc.,  collectively  known  as  the 
"chromatic"  lines,  and  various  "dispatch  lines" — "Mer- 
chants," "Empire,"  and  "National";  all  of  which  were 
used  for  the  handling  of  through  traffic  at  a  mileage  rental. 
These  lines  were  very  generally  owned  by  railroad  officials 
as  individuals,  and  in  consequence,  excessive  rentals  were 
often  paid,  and  traffic  w^as  sometimes  diverted  from  the 
cars  of  the  railroads  to  cars  of  these  freight  lines  to  make 
the  highest  possible  mileage.  Many  of  these  lines  still  ex- 
ist, but  in  practically  all  cases  their  ownership  is  vested 
directly  in  railroad  companies  and  not  in  railroad  officials 
as  individuals.^ 

Rolling  Stock  Companies. — At  various  times  railroad 
companies  have  been  unable  to  obtain  funds  from  their 
shareholders  for  the  purchase  of  needed  equipment,  and, 
in  consequence,  the  directors  have  organized  car  companie."? 

3  HiieluuT,  "Fast  Freifflit  Lines,"  Railway  Age  Gazcltc,  XLVTII, 
31(>-8;  Johnson  and  Iluobnor,  "Railroad  Traflic  and  Kates,"  I, 
240-53. 

87 


RAILROAD  FINANCE 

to  supply  the  want  at  a  fixed  rental.  "Whatever  the  reason 
for  such  arrangements,  they  have  been  too  often  accom- 
panied by  the  odor  of  corruption,  and  the  practice  is  no 
longer  in  favor.  "When  in  1879  the  trustees  of  the  Wiscon- 
sin Central  found  it  necessary  to  raise  funds  for  new 
equipment,  they  were  unable  to  obtain  the  required  amount 
from  the  shareholders.  They  therefore  organized  the  Cen- 
tral Car  company,  taking  in  such  shareholders  as  chose  to 
participate.  This  company  furnished  the  equipment  on  a 
rental  contract,  with  the  provision  that  the  trustees  might 
purchase  the  property  at  any  time  upon  payment  of  cost 
and  interest  less  the  amount  already  paid  in  the  form  of 
rent.  By  this  means  it  was  claimed  a  saving  of  twenty-five 
per  cent,  was  effected  upon  the  demands  of  outside  rolling 
stock  companies.  The  United  States  Rolling  Stock  com- 
pany was  the  best  known  company  of  this  sort.  It  was 
organized  to  deal  with  the  Atlantic  and  Great  Western 
railroad,  but  its  business  expanded  until  it  had  contracts 
with  many  companies.  The  Philadelphia  and  Reading 
railway  company  owns  no  equipment,  but  leases  its  rolling 
stock  and  motive  power  from  the  Reading  company,  which 
as  a  security-holding  company  also  owns  all  of  its  capital 
shares. 

Private  Car  Lines. — Railroad  officials  have  always  been 
slow  to  adopt  new  forms  of  equipment  designed  for  a 
particular  variety  of  traffic.  They  have,  however,  afforded 
inventors  opportunity  for  carrying  on  experiments,  and 
when  satisfied  of  the  value  of  a  new  process  or  device,  they 
have  entered  into  contracts  for  its  use  at  a  fixed  rental. 
Thus  a  large  proportion  of  the  cars  for  the  carrying  of  oil, 
live-stock,  and  perishable  food  products  are  hired  by  the 
railroads  from  their  owners,  who  are  frequently  the  manu- 
facturers or  producers  of  the  goods  which  are  carried  in 
their  own  cars.  The  tendency  to-day,  independent  of  any 
new  legislation,  is  toward  the  direct  control  by  a  railroad 

88 


FINANCING  EQUIPMENT 

company  of  all  the  facilities  used  in  transportation.  The 
Atchison,  Topeka,  and  Santa  Fe  has  for  several  years 
hauled  its  refrigerator  traffic  in  cars  owned  by  a  subsidiary 
corporation,  and  the  Union  Pacific  in  1907  also  adopted 
this  policy.* 

PROVISION   FOR  REPAIRS   AND   RENEWALS 

Replacement  of  Equipment. — All  productive  property  is 
subject  to  deterioration  and  obsolescence.  There  is  in 
every  operating  plant  constant  need  for  repairs  and  cur- 
rent renewals  of  materials  and  minor  parts  which  have 
worn  out  in  service ;  such  expenses  are  commonly  charged 
against  current  revenues  as  one  of  the  costs  of  operation. 
There  is  a  point,  however,  beyond  which  repairs  cannot  be 
economically  made,  the  alternative  being  replacement  of  the 
entire  mechanism  by  a  new  one.  Equipment  may  be  kept 
in  good  repair,  but  there  comes  a  time  w-hen  it  must  be 
replaced.  If  a  part  of  the  plant  which  has  been  in  use 
for  a  term  of  years  is  renewed,  and  particularly  if  the  cost 
is  great,  equity  to  all  parties  in  interest  requires  that  the 
management  distribute  the  charge  over  the  earnings  of 
several  years.  This  method  of  financing  prevents  the  bur- 
dening of  current  earnings  with  an  expense  largely  attribu- 
table to  the  operations  of  previous  years,  and  tends  to  pre- 
serve that  uniformity  of  net  income  which  is  so  desirable 
from  the  standpoint  of  both  the  management  and  the  in- 
vestor. When  this  practice  prevails,  funds  are  provided 
by  taking,  from  time  to  time,  out  of  current  earnings  such 
amounts  as  are  estimated  to  be  sufficient  to  provide  ade- 
quately for  the  accruing  waste  or  loss  due  to  irreparable 
deterioration.  These  amounts  may  be  set  aside  in  a  re- 
serve or  special  suspense  account,  or  they  may  be  used  to 
purchase    new    equipment    without    having   the    purchase 

•»  See  Johnson  and  Huebner,  I,  212-39. 

89 


RAILROAD  FINANCE 

appear  as  adding  to  the  working  capital  of  the  company. 
Generally  speaking,  railroad  managers  have  not  been  con- 
sistent in  their  treatment  of  this  subject,  and  in  many  in- 
stances they  have  used  the  equipment  account  as  a  con- 
venient means  of  juggling  the  finances  of  the  company  for 
the  benefit  of  special  interests. 

Provision  for  Obsolescence. — In  addition  to  allowances 
for  repairs  and  replacements  due  to  wear  and  tear,  it  is 
necessary  to  provide  for  the  final  renewal  of  the  plant  as 
a  whole  when  it  shall  have  become  antiquated  or  obsolete. 
The  remedy  for  obsolescence  is  the  same  as  for  irreparable 
wear  and  tear;  that  is,  replacement.  Equity  to  all  parties 
in  interest  requires  that  it  be  financed  in  the  same  manner, 
the  estimated  amount  to  be  apportioned  and  evenly  dis- 
tributed over  the  life  of  the  equipment.  The  amount  thus 
falling  on  each  year,  quarter,  or  month  would  then  be 
regarded  as  a  part  of  the  expense  of  maintenance,  or  in 
any  event  appear  as  a  charge  against  current  income. 
In  practice,  however,  the  distinction  is  almost  universally 
lost  sight  of.  There  is  no  uniformity  of  practice.  When 
any  provision  for  depreciation  is  made,  it  is  commonly 
financed  through  extra  appropriations  to  the  replacement 
reserve,  or  through  direct  charges  against  surplus. 

The  theory  suggested  is  the  practice  in  industrial  enter- 
prises where  the  principles  of  financing  and  accounting  for 
depreciation  are  understood  and  adequately  applied.  By 
this  method  only  is  it  possible  to  arrive  at  an  accurate 
statement  of  net  revenue,  and  thus,  insure  the  absolute 
maintenance  of  capital.  Such  also  has  been  the  practice 
upon  the  more  progressive  railroads  with  regard  to  re- 
newals of  equipment,  and  in  some  instances  replacement 
funds  have  been  set  aside  in  cash.  Each  accrual  has  been 
charged  as  expense,  and  set  up  as  a  reserve  against  the 
assets.  If,  as  has  been  often  the  case,  the  cost  exceeded  the 
amount  of  the  fund  or  cash  released  to  the  credit  of  the 

90 


FINANCING  EQUIPMENT 

reserve,  the  excess  has  been  charged  to  additions  and  bet- 
terments payable  out  of  income,  or  to  capital  account,  ac- 
cording to  the  policy  of  the  company.  By  many  managers 
it  has  been  urged  that  such  a  financing  of  depreciation  is 
impractical.  What  this  means  is  that  they  do  not  have 
the  information  needed  to  make  them  intelligent  about 
this  part  of  the  business.  They  are  still  urging  rule  of 
thumb  methods,  guessing  at  results  from  present  observa- 
tion, and  leaving  the  shareholders  and  bondholders  without 
a  basis  for  even  a  guess.  The  real  difference  betv.-een  what 
they  call  theoretical  and  what  they  call  practical  h  that  the 
theorist,  caring  nothing  for  the  facts  pertaining  to  a  par- 
ticular property,  suggests  a  method  for  getting  at  the 
facts  as  a  basis  for  a  satisfactory  conclusion,  whereas  the 
practical  man  has  such  facts  as  are  matters  of  personal  ex- 
perience, and  so  rests  content  with  conclusions  based  on 
feeling  or  on  a  general  impression  without  having  any 
means  of  verification  or  any  method  for  the  location  of 
responsibility  for  error.  This  leaves  the  way  open  to 
abuse. 

Abuses  of  Repairs  and  Renewals  Account. — Prudent 
managers  have  been  able  in  periods  of  prosperity  to  ex- 
pend large  sums  to  acquire  new  equipment,  and  thus  re- 
store the  operative  efficiency  which  was  allowed  to  become 
impaired  during  periods  of  depression,  and  also  to  make 
adequate  provision  for  future  periods  of  lessened  activity. 
But  advantage  has  been  taken  of  this  prerogative  of  man- 
agement to  allow  dishonest  executives  to  overstate  net 
earnings  in  periods  when  it  was  desired  to  make  a  favor- 
able sliowing,  wliether  to  infiuenee  prices  upon  the  stock 
market,  or  for  some  other  reason.  Some  railroads  have 
also  permitted  the  charging  to  capital  of  expenditures  for 
equipment  which  should  have  been  applied  to  current 
revenues. 

Requirements  of  the  Interstate  Commerce  Commission. — 

91 


RAILROAD  FINANCE 

With  the  additional  power  conferred  by  the  Hepburn 
amendment  to   the  act  to  regulate  commerce,  passed  in 

1906,  the  interstate  commerce  commission  has  promulgated 
a  uniform  system  of  railroad  accounts,  and  in  the  words  of 
Doctor  Henry  C.  Adams,  "the  most  important  prin- 
ciple embodied  in  the  new  system  of  accounting  is  the 
fact  that  carriers  are  required  to  set  up  formal  de- 
preciation accounts  in  operating  charges  for  all  classes 
of  equipment.  On  their  formal  side  these  depreciation 
charges  are  designed  as  a  means  of  arriving  at  a  correct 
statement  of  net  revenues,  but  perhaps  their  most  impor- 
tant result  will  be  to  protect  investments  and  to  prevent 
the  management  from  paying  dividends  by  depleting  the 
property."  ^ 

Reserve  Account  for  Each  Class  of  Equipment. — Under 
the  old  classification  repairs,  renewals,  and  depreciation 
were  combined  under  one  formal  account — **  Repairs  and 
Renewals" — but  a  separate  account  must  now  be  kept  for 
each.  The  commission  holds  that  such  a  separate  showing 
of  depreciation  charges  is  necessary  in  order  to  guarantee 
that  the  full  cost  of  maintenance  and  no  more  than  that 
amount  be  set  against  the  revenue  of  a  particular  operating 
period,  and  thus  protect  the  integrity  of  the  net  revenue 
statements  published  by  the  carriers.     Beginning  July  1, 

1907,  it  therefore  required  that  there  be  established  for 
each  class  of  equipment  separate  reserve  accounts,  to 
which  should  be  credited  monthly  the  amount  of  accrued 
depreciation.  To  these  reserves,  all  new  equipment  was 
to  be  charged.  The  rate  of  depreciation  to  be  set  up 
was  left,  temporarily  at  least,  to  the  determination  of 
the  carriers,  but  the  rate  so  established  was  to  be  subjected 
to  tests  by  the  commission.  The  basis  of  accumulation,  or 
the  amount  to  which  this  percentage  rate  was  to  be  applied 

5  Interstate  Commerce  Commission,  Statistics  of  Kailways,  1906 : 
11. 

92 


FINANCING  EQUIPMENT 

might  be  the  original  cost,  record  value,  or  purchase  price 
of  the  equipment.  On  July  1,  1910,  this  rule  was  slightly 
modified. 

The  Theory  Behind  the  Neiv  Eequircment. — As  to  the 
method  to  be  followed  in  the  application  of  depreciation 
charges  to  current  operations,  the  rules  which  involve  the 
actuarial  principles  of  ordinary  insurance  are  recom- 
mended in  preference  to  those  which  rest  upon  the  appli- 
cation of  the  sinking-fund  theory;  and  this  preference 
rests  entirely  upon  a  consideration  of  the  character  of  rail- 
way equipment.  "This  means,"  explains  Doctor  Adams, 
"that  the  fund  accumulated  by  depreciation  charges 
should  not  be  reserved  as  an  accumulation  until  it  can  be 
spent  for  the  purpose  of  replacing  the  identical  property 
upon  which  the  fund  accumulated  when  such  property  is 
abandoned;  but,  on  the  contrary,  that  this  fund  should  be 
expended,  in  whole  or  in  part,  during  the  year  in  which  it 
is  created  in  the  replacement  of  other  equipment  or  in  the 
purchase  of  new  equipment.  It  is  not  intended  to  say 
that  the  entire  accumulation  of  a  year  must  be  expended 
during  the  year.  The  wisdom  of  purchasing  new  equip- 
ment or  of  replacing  equipment  destroyed  is  a  matter  of 
business  policy,  and  the  decision  as  to  the  time  or  extent  of 
such  purchase  or  replacement  lies  with  the  board  of  direc- 
tors; it  does  mean,  how^ever,  that  the  replacement  fund 
should  be  used  for  the  purpose  for  which  it  was  created." ^ 

It  has  been  the  practice  of  many  carriers  to  consider  that 
all  the  requirements  of  maintenance  were  met  when  the 
original  carrying  capacity  of  their  equipment  was  kept  up, 
regardless  of  the  number  or  value  of  the  cars  or  locomo- 
tives. Others  have  sought  to  accomplish  the  same  result 
by  keeping  full  the  number.s  in  equipment  series.  All  this 
must  now  be  done  away  with  in  view  of  the  declaration  of 

6  Interstate  Commerce  Commission,  Accounting  Series  Circular, 
no.   13. 

93 


RAILROAD  FINANCE 

the  commission  that  "the  question  of  depreciation  is  fun- 
damentally a  question  of  values."  It  is  allowable,  how- 
ever, for  the  carriers  at  their  discretion  to  calculate  depre- 
ciation upon  the  basis  of  either  the  value  of  individual  cars 
and  locomotives,  or  the  value  of  series  of  such  equipment. 
Finally,  it  is  claimed  by  Doctor  Adams  that  "the  require- 
ment of  the  new  classification  relative  to  depreciation  is  in 
no  sense  revolutionary ;  on  the  contrary,  it  aims  to  do  in  an 
orderly,  systematic,  and  scientific  manner  what  under  the 
old  classification  was  aimed  at  by  a  more  or  less  arbitrary 
method  of  procedure." 


CHAPTER  VI 

ORGANIZATION    FOR    FINANCIAL    MANAGEMENT 

Corporate  Powers  of  Management. — It  is  a  primaiy 
principle  of  corporate  organization  that  the  proprietors 
shall  have  no  direct  part  in  management.  The  share- 
holder is  essentially  a  cestui  que  trust,  or  person  who  has  a 
beneficial  interest  in  an  estate  the  legal  title  to  which  is 
held  by  another.  The  trustee  for  the  shareholder  is  a 
legally  constituted,  inanimate,  immaterial  person — the 
corporation — which  holds  the  legal  title  to  all  the  funds  and 
properties  contributed  or  acquired.  Being  inanimate  and 
without  mind,  the  corporation  cannot  contract  or  perform 
any  act  except  through  living  agents  or  servants ;  it  can  only 
legally  hold.  The  corporate  agents  or  servants  are  of  three 
classes,  directors,  officers,  and  subordinate  employees,  all 
of  whom  are  trustees  for  the  corporation  and  not  for  the 
shareholders  so  far  as  the  funds  and  properties  in  their  cus- 
tody are  concerned.  To  these  agents  or  servants  are  en- 
trusted the  functions  of  management.  By  reason  of  the 
inability  of  the  corporation  as  such  to  act,  the  directors  are 
chosen  for  it  by  the  shareholders;  the  directors  in  turn 
choose  the  officers,  who  choose  the  subordinate  employees. 
As  managing  tru.stees  of  the  corporation,  each  class  of  cor- 
porate agents  or  servants  has  its  respective  powers  and  du- 
ties carefully  defined.  The  directors  acting  as  a  body  or 
board  pass  upon  all  questions  of  policy,  appoint  the  officers, 
and  prescribe  rules  for  the  conduct  of  the  business  of  the 
corporation.  The  officers  as  the  executives  of  the  corpo- 
ration carry  out  the  policies  and  instructions  of  the  board 
of  directors,  having  immediate  responsibility  for  the  de- 
tails of  employment  of  subordinates,  purchases,  sales,  and 

95 


RAILROAD  FINANCE 

operation.  The  subordinate  employees  are  assistants  to  the 
officers,  charged  with  responsibility  for  the  performance  of 
specific  branches  of  detailed  work. 

As  the  creature  of  the  state,  a  railroad  corporation  is  re- 
sponsible for  the  maintenance  and  operation  of  a  public 
highway,  in  the  management  of  which  the  state  has  a  right 
to  intervene.  But  it  is  only  when  the  beneficial  interest 
of  the  shareholder  cannot  be  protected  through  the  legally 
designated  agents  of  the  corporation  that  the  shareholder 
may  have  resort  to  the  courts  for  intervention.  As  the 
management  is  of  necessity  entrusted  to  the  directors,  offi- 
cers, and  subordinate  employees,  it  follows  that  interfer- 
ence by  the  shareholders  with  the  exercise  of  discretion  in 
acts  of  management  will  be  permitted  only  in  the  manner 
provided  by  the  corporate  organization,  unless  it  may  ap- 
pear that  such  action  is  inadequate  to  protect  the  corpo- 
rate trust.  "While  the  principles  of  law  and  equity  gov- 
erning corporate  servants  are  very  strict,  the  machinery  by 
which  these  principles  may  be  applied  is  so  complicated 
and  expensive  to  put  in  operation  and  the  evidence  of  in- 
discretion or  infidelity  is  so  difficult  to  obtain  that  the  in- 
terests of  the  shareholders  are  practically  at  the  mercy  of 
the  directors  and  officers,  who  have  come  in  many  instances 
to  assume  an  attitude  of  proprietorship  inconsistent  with 
their  position  of  servants  of  the  corporation. 

Financial  Management. — It  is  necessary  to  distinguish 
between  financial  and  physical  management.  As  a  means 
of  acquiring,  equipping,  maintaining,  and  operating  a  rail- 
road, it  is  necessary  to  have  funds.  To  this  end  capital 
is  obtained,  arrangements  are  made  for  temporary  loans, 
rates  are  fixed,  and  charges  and  collections  are  made. 
Having  obtained  the  necessary  funds  from  capitalization, 
from  collections  for  transportation  service,  and  from  sales, 
arrangements  must  be  made  to  meet  obligations  and  finally 
to  apportion  and  distribute  the  surplus.     These  are  func- 

96 


ORGANIZATION  FOR  FINANCIAL  MANAGEMENT 

tions  of  financial  management.  On  the  other  hand,  the 
physical  properties  are  for  use  in  carrying  out  the  purposes 
of  the  corporation ;  and  construction  work,  repairs  and  re- 
placements, additions  and  betterments,  and  operation  are 
therefore  within  the  scope  of  physical  management  as  well. 
Financial  Organization. — This  distinction  between  finan- 
cial and  physical  management  has  been  recognized  from  the 
earliest  railroad  period.  The  treasurer  was  the  financial 
officer,  and  the  secretary  in  addition  to  his  regular  duties 
served  as  clerk  to  the  board  and  custodian  of  records.  The 
only  other  officer  was  the  president,  who  was  also  chairman 
of  the  board  and  so  the  dominating  force  in  all  matters 
whether  of  financial  or  physical  nature.  So  long  as  the 
railroad  was  operated  as  a  sort  of  improved  turnpike,  the 
simplest  form  of  organization  was  adequate.  With  the 
broadening  of  the  functions  of  a  railroad  corporation,  how- 
ever, the  number  of  employees  increased ;  and  as  these  em- 
ployees became  more  and  more  specialized,  a  more  elabo- 
rate form  of  organization  developed.  The  great  system  of 
to-day  has  not  only  a  board  of  directors,  but  two  other 
bodies  midway  between  the  board  and  the  officers.  These 
are  the  executive  committee  and  the  financial  committee. 
The  president  is  ex-officio  member  and  generally  head  of 
one  or  both  committees.  The  president  may  also  be  chair- 
man of  the  board,  as  such  presiding  at  meetings  of  the 
board  and  of  the  corporation.  Within  the  last  decade, 
however,  there  has  been  a  tendency  to  subordinate  the 
physical  to  the  financial  aspects  of  management,  and  the 
president  has  been  relieved  of  many  of  his  financial  re- 
sponsibilities. This  has  been  done  by  electing  a  separate 
officer  as  chairman  of  the  board.  In  most  instances  the 
person  chosen  for  this  position  has  already  served  as  presi- 
dent. The  effect  of  this  division  of  responsibility  is  to 
give  to  the  chairman  of  the  board  general  charge  of  finan- 
cial matters,  leaving  to  the  president  full  authority  over 
8  97 


RAILROAD  FINANCE 

matters  of  physical  operation.  In  some  systems  the  chair- 
man of  the  board  holds  the  same  position  in  all  of  the  con- 
stituent corporations,  each  of  which  may  have  a  separate 
operating  head  or  president.  Directly  under  the  president 
are  the  heads  of  the  executive  departments — transporta- 
tion, traffic,  finance,  and  law.  Some  large  railroads,  which 
have  not  followed  this  plan,  have  relieved  the  president  by 
entrusting  the  management  of  financial  affairs  to  a  vice- 
president  ;  others  still  have  the  treasurer  as  chief  financial 
officer. 

The  Treasurer. — "Whatever  the  relation  between  the 
board  and  officers  or  between  different  officers  in  the  con- 
duct of  financial  affairs,  the  treasurer  is  always  in  imme- 
diate charge  of  all  the  financial  resources  of  the  company. 
He  receives  remittances  from  the  various  departments,  and 
pays  out  money  on  vouchers  approved  by  the  auditor.  He 
keeps  the  securities  owned  by  the  company,  except  such  as 
are  deposited  as  collateral  for  loans.  His  signature  ap- 
pears upon  all  evidences  of  indebtedness  issued  by  the  com- 
pany. Subordinate  to  him  are  the  assistant  treasurer,  the 
cashier,  and  the  paymasters.  When  the  directors  declare 
a  dividend,  it  is  the  duty  of  the  treasurer  to  assemble  the 
funds  for  its  payment  and  to  make  the  distribution.  He 
must  also  attend  to  the  payment  of  interest  on  the  debt. 
At  one  time  he  may  have  a  redundancy  of  current  funds, 
so  that  it  may  be  expedient  to  put  a  portion  out  at  inter- 
est; at  another  time  he  may  have  to  negotiate  a  temporary 
loan.  The  chief  financial  official,  whatever  his  title,  also 
acts  as  the  advisor  of  the  directors,  and  represents  them  in 
all  dealings  with  banking  houses. 

Transfer  Agent  and  Begistrar. — The  treasurer  of  some 
railroads  also  acts  as  transfer  agent  but  it  is  the  gen- 
eral practice  to  have  this  work  performed  by  a  bank 
or  trust  company,  sometimes  in  the  home  city  of 
the    corporation,    usually    in    New    York.     The    transfer 

98 


ORGANIZATION  FOR  FINANCIAL  MANAGEMENT 

agent  receives  from  the  purchasers,  certificates  of  shares 
and  registered  bonds  which  have  changed  ownership ;  for 
these  he  issues  receipts  which  may  be  exchanged  for  new 
certificates  at  the  office  of  the  registrar.  The  registrar, 
w^iich  almost  invariably  is  a  bank  or  trust  company,  has  a 
supply  of  unissued  certificates  for  this  purpose,  and  the 
books  of  the  company  upon  which  the  names  of  the  new 
owners  are  entered.  The  functions  of  the  transfer  agent 
and  of  the  registrar  cannot  be  performed  by  the  same  insti- 
tution, for  it  is  necessary  to  have  an  absolute  check  upon 
the  amount  of  securities  outstanding.  The  New  York 
stock  exchange  refuses  to  list  any  security  of  a  company 
which  does  not  provide  for  independent^records  of  trans- 
fer and  of  registration. 

Fiscal  Agent. — Either  the  transfer  agent  or  the  regis- 
trar may  also  act  as  fiscal  agent.  It  is  the  function  of  the 
fiscal  agent  in  addition  to  conducting  the  sale  of  new  se- 
curities, to  redeem  interest  coupons  and  maturing  notes 
and  bonds  of  the  company.  Dividends  on  shares  and  in- 
terest on  registered  bonds  are  paid  by  check  from  the  office 
of  the  treasurer.  When  the  directors  declare  a  dividend, 
they  also  specify  the  period  within  which  the  transfer 
books  shall  be  closed,  in  order  that  payment  may  be  made 
to  the  actual  holders  of  the  capital  shares  upon  the  divi- 
dend date. 

Transfer  and  Registration  of  Securities. — While  there  is 
printed  upon  the  reverse  side  of  every  share  certificate,  an 
assignment  blank  for  the  purpose  of  transfer,  many  shares 
pass  from  hand  to  hand  bearing  indorsements  in  blank. 
This  is  particularly  the  case  when  a  share  pays  no  divi- 
dends. When  bonds  are  Gold,  the  accrued  interest  is  added 
to  the  market  quotation  in  determining  the  price.  Bonds 
may  be  registered  as  to  principal  and  interest,  or  they  may 
be  registered  as  to  principal,  and  bear  interest  coupons. 
The  ordinary  coupon  bond,  however,  is  not  registered.     In 

99 


RAILROAD  FINANCE 

some  instances,  shares  have  been  issued  with  coupons  to 
represent  dividends.  Thus  when  the  management  of  the 
Central  Pacific  wished  to  retain  voting  control  and  the 
English  shareholders  desired  immunity  from  their  heavy 
liability  under  the  California  law,  it  was  decided  to  issue 
shares  through  dummies,  who  would  endorse  them  in 
blank,  at  the  same  time  giving  irrevocable  proxies  to  the 
directors.  The  coupon  form  of  certificate  was  adopted  as 
a  convenient  means  of  issuing  payment  of  dividends  to  the 
actual  owners  of  the  shares.^ 

Organization  for  Protection  of  Investors. — ]\Iuch  of  the 
share  capital  of  American  railroads  held  in  Europe  was 
originally  endors«d  in  blank  so  that  the  owners  had  no  con- 
trol over  the  acts  of  directors.  In  Holland  this  difficulty 
has  been  met  by  the  organization  of  various  handling  com- 
panies or  bureaus  of  administration — administratie  kan- 
iorcn — which  act  as  clearing  houses  for  the  convenient  ex- 
change of  American  securities.  Against  these  securities 
they  issue  their  own  certificates,  which  are  dealt  in  upon 
the  Amsterdam  bourse.  They  receive  dividends  and  inter- 
est, and  distribute  them  among  certificate  holders  in  return 
for  a  small  collection  fee.  But  the  buyer  of  shares  through 
such  a  company  may,  if  he  choose,  call  for  their  redelivery, 
for  the  certificates  of  the  handling  company  which  are  is- 
sued exactly  represent  transactions  in  Amsterdam,  or  else- 
vvhere  for  Amsterdam  account.^ 

Association  of  American  Bond  and  Share  Holders. — It 
was  upon  this  model  that  the  English  Association  of  Ameri- 
can Bond  and  Share  Holders  was  organized  in  1884.  This 
association  issues  its  certificates  against  American  securi- 
ties, which  are  registered  in  its  name.  These  certificates, 
which  are  in  denominations  of  $1000,  are  countersigned  by 

1  Doyle,  "Tlie  Central  Pacific  Eailroad  Debt."  55  cong.  1  sess., 
S.  rep!  no.  20,  pp.   310-1. 

2  Santilhano,  " Amerikaansche  spooricegen,"  viii-ix. 

100 


ORGANIZATION  FOR  FINANCIAL  MANAGEMENT 

the  London  and  Westminster  bank  as  depository  of  the 
American  securities  in  trust.  Each  one  represents  a  spe- 
cific block  of  securities,  and  to  each  is  attached  a  numbered 
series  of  coupons  representing  dividends  or  interest  pay- 
ments. As  all  the  certificates  are  payable  to  bearer,  there 
is  no  difficulty  in  case  of  the  death  of  the  holder,  and  all 
that  is  necessary  to  collect  a  dividend  is  to  forward  the 
coupon  to  the  association  or  deposit  it  with  a  bank.  The 
association  will  if  desired,  issue  instead  of  its  own  certifi- 
cates, American  securities  registered  in  its  name  and  en- 
dorsed in  blank.  In  such  case  the  securities  must  be  pre- 
sented to  the  association  for  the  collection  of  interest  or 
dividends.  For  a  fee  of  three  pence  a  share,  the  associa- 
tion will  also  obtain  the  transfer  of  any  American  security 
to  the  name  of  the  actual  owner.^ 

Investment  Trusts. — Besides  this  association  there  are 
many  investment  trust  companies  in  England  and  Scot- 
land which  operate  upon  the  principle  of  averaging  invest- 
ments. These  share  trusts,  as  they  are  also  called,  do  not 
limit  their  investments  to  American  railroad  shares,  but 
extend  their  activities  all  over  the  world.  One  of  the 
pioneer  companies  of  this  sort  was  the  American  Invest- 
ment Trust,  organized  in  1873.  Its  object,  in  the  words 
of  its  prospectus,  Mas  "to  enable  the  moderate  investor  to 
spread  his  investment  over  a  number  of  different  securi- 
ties, recommended  by  competent  advisors  as  intrinsically 
sound  and  likely  to  increase  in  value,  and  which  will  be  lim- 
ited to  the  bonds  of  the  Governments,  States,  Cities,  Coun- 
ties and  public  undertakings,  especially  railroads  and  public 
works  of  the  United  States  and  Canada,  but  with  power  to 
the  trustees  to  invest  in  paid-up  shares  of  undertakings 
actually  earning  income."  Thirty-year  certificates  in  de- 
nominations of  100  were  offered,  which  should  be  redeem- 

3  Van  Oss,  "American  Railroads  as  Investments,"  143-4;  Spencer 
Churcliill,  "Virginia  Mines  and  American  Rails,"  Fortnightly  Rev. 
(n.s.),  XLTX,  796-7. 

101 


RAILROAD  FINANCE 

able  at  105  by  yearly  drawings  out  of -profits.  Redemption 
of  all  the  certificates  before  the  expiration  of  thirty  years 
would  terminate  the  trust,  and  if  at  the  end  of  that  period 
certificates  should  be  outstanding,  they  should  be  paid  off, 
after  which  the  balance  to  the  credit  of  the  trust  should 
be  distributed  pro  rata  among  the  holders  of  the  reversion 
certificates  issued  to  represent  the  original  certificates  re- 
deemed at  the  annual  drawings.*  Other  organizations 
similar  in  character  which  were  formed  about  this  time  are 
the  Railway  Debenture  Trust  company,  and  the  Railway 
Share  Trust.  The  British  financial  journals  regularly  list 
the  securities  of  a  large  number  of  such  companies.  They 
have  performed  a  real  service  to  the  investor  on  account  of 
their  superior  facilities  for  obtaining  information,  and  con- 
sequent ability  to  make  a  more  judicious  selection  among 
the  large  variety  of  American  securities  than  could  be  done 
by  an  ordinary  individual. 

The  Voting  Trust. — Frequent  use  of  the  voting  trust  has 
been  made  to  protect  the  interest  of  investors  in  the  securi- 
ties of  American  railroads.  The  shareholders  by  this 
method  agree  to  delegate  the  voting  power  of  their  shares 
to  certain  specified  persons  who  serve  as  voting  trustees 
either  for  a  certain  period  of  time  or  until  certain  evidence 
shall  be  presented  to  show  the  accomplishment  of  the  pur- 
pose for  which  the  voting  trust  may  be  established.  Thus 
while  the  shareholders  participate  in  any  dividends  which 
may  be  declared,  the  control  of  the  management  is  concen- 
trated in  a  few  hands.  In  this  waj^  holders  of  certain 
issues  of  shares  may  prevent  contracts  which  they  believe 
to  be  against  their  interest,  or  they  may  regulate  the  issu- 
ance of  additional  share  capital  and  bonds.  The  chief  pur- 
pose for  which  the  voting  trust  has  been  employed,  how- 
ever, is  to  enable  the  bondholders  by  choosing  the  trustees 
to  have  definite  assurance  that  the  property  of  a  foreclosed 

*  Economist,  XXXI,  334. 

102 


ORGANIZATION  FOR  FINANCIAL  MANAGEMENT 

and  reorganized  railroad  shall  be  managed  in  such  a  man- 
ner that  the  security  of  their  mortgages  will  be  maintained, 
ilore  detailed  attention,  therefore,  will  be  given  to  this  sub- 
ject in  the  discussion  of  reorganization. 

Independent  Auditors. — A  railroad  report  is  the  official 
expression  of  the  board  of  directors  to  the  proprietors  or 
shareholders  of  the  company.  It  is  the  evidence  of  per- 
formance of  the  duties  of  stewardship,  and  thus  should  be 
regarded  as  a  statement  of  an  interested  party.  Hence 
there  is  liability  that  in  the  report  of  a  dishonest  manage- 
ment, essential  facts  will  be  obscured  or  misstated,  and 
that  even  in  eases  where  there  is  every  evidence  of  fidelity, 
certain  salient  data  may  not  be  expressed  in  their  proper 
relation.  A  dishonest  report  from  the  standpoint  of  the 
investor  would  be  no  worse  than  an  over-optimistic  state- 
ment of  absolute  facts,  for  an  account  may  represent  not 
only  facts  but  also  opinions  about  facts.  It  early  oc- 
curred to  the  English  investor  that  his  interest  would  be 
best  conserved  by  means  of  independent  examinations  of 
the  accounts  of  railroads  to  determine  the  fairness  and  ac- 
curacy of  the  official  reports.  It  has  long  been  the  prac- 
tice, therefore,  for  the  shareholders  in  English  railroads  to 
choose  independent  auditors  at  the  regular  meetings. 
Owing  to  the  demands  of  English  shareholders  this  plan 
has  been  adopted  upon  railroads  like  the  Chicago  Great 
Western,  the  Denver  and  Rio  Grande,  and  the  New  York, 
Ontario,  and  Western  (under  its  old  management).  But 
except  as  a  concession  to  unwarranted  fears  of  those  share- 
holders who  distrust  the  reliability  of  American  railroad 
officials,  the  practice  has  not  been  generally  approved  in 
this  country.  Moreover,  American  shareholders  do  not  at- 
tend annual  meetings  in  any  numbers,  as  is  the  custom  in 
England,  and  the  actual  voting  is  done  through  a  few 
holders  of  proxies,  who  invariably  represent  the  directors 
in  control.     For  these  proxy-holders  to  elect  independent 

103 


RAILROAD  FINANCE 

auditors  to  check  the  accounts  of  directors  also  chosen  by 
them  -would  defeat  the  purpose  of  the  audit.  The  losses 
which  have  been  sustained  by  holders  of  American  railroad 
shares,  with  but  few  prominent  exceptions,  have  been  caused 
not  by  manipulation  of  accounts  but  by  errors  of  manage- 
ment and  policy.  Against  such  defects  an  audit  furnishes 
no  protection  other  than  to  bring  to  the  attention  of  share- 
holders defects  in  method  and  to  point  out  the  unsatisfac- 
tory nature  of  the  report  itself. 

PuUic  Accountants. — Within  the  last  twenty  years  a 
number  of  American  railroads  have  employed  certified  pub- 
lic accountants,  who  examine  the  accounts  upon  which  are 
based  the  reports  of  the  chief  accounting  official  and  make 
certified  reports  to  the  president  or  board  of  directors.  All 
that  is  accomplished  through  the  English  practice  may  be 
attained  in  this  manner.  The  danger  which  lies  in  the 
American  practice  is  not  that  accountants  of  ability  and 
integrity  may  not  be  obtained,  but  that  the  conditions  of 
their  engagement  may  limit  their  power.  Furthermore, 
when  a  report  is  made  to  the  officers,  it  may  never  be  pre- 
sented to  the  shareholders.^ 

Protection  of  the  Corporation  from  Its  Financial  Offi- 
cers.— Owing  to  the  various  requirements  which  now  have 
to  be  complied  with  in  issuing  new  certificates  of  shares  or 
bonds  not  only  are  the  interests  of  security  holders  amply 
safeguarded,  but  the  interests  of  the  corporation  itself  is 
protected  from  its  own  financial  officers.  This,  however,  is 
the  result  of  unfortunate  experience.  Until  1854  there 
were  no  checks  upon  the  acts  of  transfer  agents ;  and  it  was 
only  natural,  therefore,  that  there  should  have  been  in- 

5  "A  new  profession  of  railway  accountants,  wholly  independent, 
officially,  of  any  railway  system,  must  be  developed  before  entire 
frankness  and  absolute  truthfulness  can  be  secured  as  between  the 
owners,  the  public,  and  the  administration  of  railway  property." — 
Sterne,  "Recent  Railroad  Failures  and  their  Lessons,"  Forvm.  XVII, 
31.     (1894.) 

104 


ORGANIZATION  FOR  FINANCIAL  MANAGEMENT 

stances  of  fraudulent  issue  of  securities.  In  1834  the  sec- 
retary of  the  Camden  and  Amboy,  who  was  also  transfer 
agent,  improperly  issued  shares  in  excess  of  the  amount  al- 
lowed by  the  charter,  as  collateral  for  a  loan.*'  But  the  most 
remarkable  breach  of  trust  of  this  nature  was  that  of  Robert 
Schuyler  in  1854.  Schuyler  was  one  of  the  most  promi- 
nent railroad  men  in  the  country,  holding  the  position  of 
president  of  the  New  York  and  New  Haven,  the  New  York 
and  Harlem,  the  Rensselaer  and  Saratoga,  the  Illinois  Cen- 
tral, and  the  Sangamon  and  Morgan  railroads.  He  was 
also  concerned  in  the  building  of  the  Vermont  Valley  and 
the  Washington  and  Saratoga,  and  in  order  to  raise  the 
necessary  funds  for  this  work  he  took  advantage  of  his 
position  as  transfer  agent  of  the  New  York  and  New  Ha- 
ven, and  issued  about  $2,000,000  of  spurious  shares.  This 
was  discovered  in  1854,  and  in  the  investigation  which  fol- 
lowed it  was  found  that  he  had  also  overissued  shares  of  the 
New  Haven  and  Northampton  and  the  Naugatuck  railroads, 
though  to  only  a  small  amount  in  each  case.  On  the  Har- 
lem, the  transfer  agent  had  likewise  overissued  shares  to 
the  extent  of  over  $275,000,  but  with  this  fraud  Schuyler 
was  not  concerned.''  The  same  year,  an  investigation  of 
the  Vermont  Central  disclosed  the  fact  that  the  president 
of  that  company  had  issued  over  10,000  shares  beyond  the 
amount  authorized  by  the  charter.^  The  discovery  of  these 
frauds  caused  a  panic  throughout  the  country,  and  resulted 
in  the  action  taken  by  the  New  York  stock  exchange  requir- 
ing that  all  share  certificates  be  signed  by  two  officials,  and 
registered  and  countersigned  by  an  independent  bank  or 
trust  company.  This  has  effectually  prevented  a  recur- 
rence of  the  offense.     Charter  limits  had  not  been  exceeded 

« Report  of  the  commissioners  appointed  to  investigate  charges 
against  the  directors  of  the  Delaware  and  Earitan  Canal  and  Cam- 
den  and   Amboy  Railroad,   Appx.,   Statement   "E."      (1850.) 

T  Hunt,  XXXI,  207;   Ackorman,  "Hist,  of  Illinois  Central,"  57-9. 

8  Annual   report,   1854. 

105 


RAILROAD  FINANCE 

upon  the  Harlem,  and  the  company  recognized  without 
hesitation  its  obligation  for  the  unauthorized  issue.  The 
New  York  and  New  Haven,  however,  asserted  that  as  the 
shares  were  illegally  issued,  they  were  void.  The  company 
thereupon  became  involved  in  litigation  which  continued 
for  over  ten  years.  In  1864  the  directors  offered  to  accept 
two  of  the  spurious  shares  in  exchange  for  one  new  share, 
and  to  increase  the  share  capital  of  the  company  to  pro- 
vide for  such  an  exchange.  Over  half  of  the  fraudu- 
lent issue  was  redeemed  in  this  manner.^  In  1865  the 
court  declared  that  overissued  shares  were  void,  what- 
ever the  circumstances  of  their  issue.  It  also  held,  however, 
that  when  as  in  this  case  the  overissued  certificates  were 
signed  by  the  officer  having  authority  to  sign  and  issued 
by  him  to  persons  who  accepted  them  in  full  faith,  the 
corporation  was  liable  for  the  act  of  its  agent."  The  loss 
to  the  corporation  through  the  Schuyler  frauds  finally 
amounted  to  over  $1,600,000.^^ 

9  Annual   report,    1864. 

ION.  Y.  and  N.  H.  v.  Schuyler,  34  N.  Y.  30.     (1865.) 

"Annual  reports,  1866-8. 


CHAPTER  VII 

PROTECTION  OF  THE  CORPORATE  ESTATE  AS  A  FUNCTION 
OF  MANAGEMENT 

The  Protection  of  Capital. — The  protection  of  the  corpo- 
rate estate  is  a  factor  of  first  importance  in  the  considera- 
tion of  management,  whether  from  the  point  of  view  of 
the  investor,  the  public,  or  of  the  corporation  itself.  The 
literature  of  economics  and  politics  is  replete  with  discus- 
sions as  to  the  social  advantage  of  lending  encouragement 
to  the  assembling  and  conservation  of  capital.  Notwith- 
standing this  active  interest  in  the  subject,  the  importance 
of  the  administrative  aspects  of  protection  of  capital  seems 
to  have  been  little  appreciated  even  by  corporation  mana- 
gers themselves. 

The  Law  of  Property. — Laws  for  the  protection  of  capi- 
tal are  as  old  as  government.  The  distinction  between 
the  concepts  of  capital  and  of  non-capital  or  current  assets 
was  first  recognized  in  the  laws  and  customs  of  inher- 
itances. There  was,  however,  no  clear  definition  of  the  con- 
cept of  capital  as  such.  In  the  laws  and  instruments  of 
conveyances,  also,  there  was  no  clearly  marked  distinction 
between  these  two  varieties  of  assets,  but  as  legal  princi- 
ples became  established,  their  essential  difference  came  to 
be  recognized. 

Inheritance  and  Remainder  Interests. — The  extent  to 
which  these  principles  were  recognized  appears  from  an 
examination  of  the  English  common  law  as  applied  to  re- 
mainders. To  use  a  familiar  example:  A  conveyance  was 
made  which  devised  an  estate  to  B  for  a  term  of  years; 
remainder  to  C  for  life;  remainder  to  D  in  fee.  The  es- 
tate so  devised  might  be  possessed  and  used  in  turn  by 
B  and  C,  but  the  courts  were  most  rigorous  in  their  guar- 

107 


RAILROAD  FINANCE 

dianship  of  the  remainder  interest  or  fee.  First  B  and 
then  C  were  viewed  as  holding  the  productive  property — 
the  capital — in  trust,  being  entitled  to  the  product  only. 
Contemporaneous  with  this  development  but  of  broader 
application  was  the  evolution  of  the  law  of  waste,  the  end 
of  which  was  to  protect  from  depletion  an  estate  in  the  pos- 
session of  one  person  but  in  which  others  had  an  interest. 
Even  where  the  remainder  was  contingent  or  made  to  de- 
pend on  an  event  which  was  doubtful  or  uncertain,  the 
capital  would  be  fully  protected  against  waste,  deprecia- 
tion, or  other  preventable  loss  while  in  the  hands  of  the 
possessor. 

The  Law  of  Uses. — Another  class  of  laws  and  customs 
may  be  mentioned;  the  law  of  uses.  Uses  existed  in  Ro- 
man law  under  the  name  of  fidei  commissa.  They  were  in- 
troduced by  testators  to  evade  the  municipal  law  which 
disabled  certain  persons,  such  as  exiles  and  strangers,  from 
being  heirs  or  legatees.  The  inheritance  or  legacy  was 
given  to  a  person  competent  to  take,  in  trust,  for  the  real 
object  of  the  testator's  bounty.  As  originally  applied,  the 
devisee  of  the  estate  was  held  to  be  the  owner  in  fee,  with- 
out any  obligation  whatever  on  his  part  to  fulfill  the  terms 
of  the  grants,  since  it  was  contrary  to  law.  A  testator 
making  such  a  will  relied  wholly  on  the  personal  integrity 
and  good  faith  of  the  one  to  whom  the  estate  was  granted. 
The  evident  justice  and  lofty  social  purpose  of  such  a 
grant  finally  commended  itself  to  the  government  in  a 
manner  to  cause  a  special  court  to  be  created  for  the  pur- 
pose of  enforcing  uses.  The  same  device  was  introduced 
in  England  to  evade  the  statute  of  mortmain.  A  use  was 
a  legal  estate  held  by  one  person  for  the  benefit  of  another, 
the  conditions  being  that  the  person  holding  the  same 
should  give  to  the  beneficiary  the  profits,  and  dispose  of 
or  transfer  the  legal  title  as  directed  by  the  beneficiary. 

The  Law  of  Agency  and  Trusteeship. — After  the  enaet- 

108 


PROTECTION  OF  THE  CORPORATE  ESTATE 

ment  of  the  statute  of  uses  in  England,  trusts  came  to  sup- 
plant them,  and  to  give  a  still  broader  application  to  the 
principle.  By  the  common  law  of  trusts  the  legal  estate 
went  to  a  trustee,  but  the  exact  conditions  of  the  devise 
were  enforceable  in  the  courts  of  equity.  The  law  of  trus- 
teeship has  been  the  one  most  frequently  invoked  in  the 
protection  of  capital.  It  is  applied  to  every  relation  where 
a  community  or  remainder  interest  is  involved  or  where 
an  agency  has  been  established  which  places  the  legal  title 
to  property  in  the  hands  of  a  trust.  In  some  instances 
statute  law  has  enlarged  this  to  include  possession.  If 
protection  to  property  require  it,  an  agency  or  trust  will 
be  implied.  For  example,  if  partnership  capital  be  invested 
in  land  for  the  benefit  of  the  company,  though  it  may  be  a 
joint  tenancy  in  law,  equity  will  hold  it  to  be  a  tenancy  in 
common  and  as  forming  a  part  of  the  partnership  fund; 
the  better  opinion  would  seem  to  be  that  equity  will  con- 
sider the  person  in  whom  the  legal  estate  is  vested  as  trus- 
tee for  the  whole  concern. 

Corporation  Law. — From  this  viewpoint,  corporation 
law  may  be  considered  as  a  special  adaptation  of  the 
law  of  trusteeship.  A  corporation  is  an  organized 
community  of  trusts.  The  proprietors  of  the  corporation 
are  its  shareholders.  The  corporation  holds  the  legal  title 
to  properties  and  stands  in  the  relation  of  debtor  to  those 
holding  its  credit  obligations.  Although  the  proprietor- 
ship of  a  corporation  is  complete  in  every  detail,  so  far  as 
the  right  to  use  and  dispose  of  property  is  concerned,  it 
has  a  trust  relation,  first  to  creditors  and  second  to  share- 
holders. The  board  of  directors  of  a  corporation  are  trus- 
tees ;  in  this  capacity  they  act  as  the  direct  representatives  or 
agents  of  shareholders,  and  direct  the  affairs  of  the  corpo- 
ration which  is  the  legal  trustee  for  the  properties.  The 
officers  of  the  corporation  are  trustees,  being  responsible, 
under  the  direction  of  the  board,  for  possession  and  for  the 

109 


RAILROAD  FINANCE 

administration  of  the  details  of  its  business.  All  the  em- 
ployees of  a  corporation,  in  so  far  as  they  have  custody  of 
property,  are  trustees.  There  is  not  a  proprietary  or  op- 
erative relation  of  a  corporation  which  is  not  subject  to  all 
of  the  limitations  and  protection  of  the  law  of  trusteeship. 
It  differs  from  other  trusts  in  that  whereas  an  ordinary 
trust  is  defined  by  the  terms  of  the  grant  or  contract  en- 
tered into  at  the  time  that  the  trust  is  created,  the  terms  of 
corporate  trusteeship  may  be  constantly  altered  to  suit  the 
conditions  and  conserve  the  highest  business  advantages 
of  the  enterprise.  This  adjustment  can  come  about:  (1) 
through  action  of  the  shareholders  in  obtaining  the 
amendment  of  the  charter  and  as  expressed  by  resolution 
affecting  the  powers  and  duties  of  officers  and  agents; 
(2)  through  action  of  the  board  of  directors,  in  the  amend- 
ment of  rules  governing  officers  and  as  expressed  by  reso- 
lution establishing  or  determining  the  policy  of  the  corpo- 
ration; or  (3)  through  administrative  direction  of  officers 
acting  within  the  limits  of  the  powers  granted  by  the 
charter  and  by  the  board. 

Provisions  for  Protection  of  Corporate  Capital. — The 
several  classes  of  trusts  established  in  corporate  organiza- 
tions are  clearly  defined.  The  principle  has  been  definitely 
established  in  corporation  law  that  only  officers  who  are 
specified  in  the  act  of  incorporation  may  bind  the  corpora- 
tion; no  other  person  or  officer  can  act  as  its  agent  in  the 
particulars  designated.  Directors  and  officers  of  a  corpo- 
ration acting  beyond  their  powers,  whereby  loss  inures  to 
the  corporation  (as  in  the  disposing  of  property  or  the 
paying  of  money  without  authority),  may  be  required  to 
make  good  the  loss  out  of  their  private  estates.  The  com- 
mon law  of  trusteeship  as  applied  to  every  corporate  rela- 
tion is  complete.  As  a  principle  of  common  law,  corporate 
agents  will  not  be  permitted  to  allow  the  corporate  estate 
to   become   depleted  through   unauthorized  acts  on  their 

110 


PROTECTION  OF  THE  CORPORATE  ESTATE 

part,  through  waste  or  even  through  the  declaration  of 
dividends  to  shareholders.  Any  reduction  in  capital,  ex- 
cept by  some  uncontrollable  circumstance  such  as  "the  act 
of  God"  must  be  by  formal  action  taken  on  the  part  of 
the  proprietors  themselves,  sanctioned  by  law  or  by  such 
procedure  as  is  prescribed  by  statute  or  by  acts  of  incor- 
poration. Following  the  common  law,  special  supplemen- 
tary legislation  is  to  be  found  in  nearly  every  state,  mak- 
ing it  unlawful  to  declare  dividends  out  of  capital,  making 
more  definite  and  certain  the  amount  of  recoverable  dam- 
ages, enlarging  the  criminal  code  to  apply  to  abuses  of 
corporate  powers  and  the  neglect  of  corporate  duties,  and 
furnishing  such  other  protection  to  the  corporate  estate 
as  is  necessary  to  prevent  injustice  to  creditors  and  the 
weakening  of  corporate  activities  through  the  subdivision 
or  distribution  of  properties  and  funds  which  are  intended 
for  capital  use. 

Prerequisites  for  Enforcing  the  Law. — "With  all  these 
legal  provisions  for  the  protection  of  capital,,  the 
first  prerequisite  of  management  is  ability  to  distin- 
guish between  capital  and  the  other  assets  of  the 
corporation;  the  second  is  familiarity  with  the  facts  gov- 
erning their  own  responsibility,  which  is  essential  to  obe- 
dience to  the  law.  Where  the  ends  of  justice  have  been  de- 
feated, where  corporate  agents  have  arbitrarily  disposed 
of  corporate  estates,  where  dividends  have  been  declared 
out  of  capital,  where  there  has  been  violation  of  law  and 
the  courts  have  failed  to  protect  the  shareholder  or  others 
interested  in  the  estate  against  the  arbitrary  acts  of  of- 
ficials whose  acts  have  depleted  the  capital,  it  has  been  not 
from  lack  of  law  but  from  lack  of  evidence  to  support 
the  rights  of  beneficiaries.  This  suggests  as  a  corollary 
the  conclusion  that  knowledge  of  facts  and  familiarity 
with  the  statutory  provisions  relating  to  accountability 
for  capital  are  essential  to  management. 

Ill 


RAILROAD  FINANCE 

Information  Necessary  to  Protection  of  the  Corporate  Es- 
tate.— In  the  United  States  the  chief  defect  in  corporation 
laws  has  been  the  failure  to  require  that  the  administra- 
tive agents  of  corporations  shall  prepare,  preserve,  and 
make  available  such  evidence  of  transactions  and  other  acts 
of  trustees  as  is  necessary  to  establish  responsibility.  The 
whole  subject  of  records  and  accounts  has  remained  in  a 
state  of  neglect.  For  enactments  at  all  adequate  for  the 
enforcement  of  common  and  statutory  law  principles  of 
corporate  trusteeship,  we  must  look  to  Great  Britain. 
These  laws  may  be  classified  as  follows: 
I.  Provisions  for  making  available  evidence  necessary 
to   the   enforcement  of  corporate  trusts 

1.  Laws  requiring  that  a  complete  record  of  tran- 

sactions be  kept 

2.  Laws  providing  for  the  current  verification  of 

evidence  recorded 

3.  Laws  requiring  the  publication  of  summaries  of 

evidence. 
II.     Provisions  for  the  preservation  of  evidence  of  breach 
of  trust 

1.  Laws  making  the  falsification  of  records  of  trus- 

teeship a  misdemeanor 

2.  Laws  making  the  destruction  of  records  a  mis- 

demeanor 

3.  Laws  making  false  statements  a  misdemeanor. 
An  important  beginning  was  made  in  Great  Britain  by 

the  passing  of  the  companies  clauses  consolidation  act  in 
1845,  which  provided  that  "The  directors  shall  cause  full 
and  true  accounts  to  be  kept  of  all  sums  of  money  received 
or  expended  on  account  of  the  company  by  the  directors 
and  all  persons  employed  by  or  under  them,  and  the  mat- 
ters and  things  for  which  such  sums  of  money  shall  have 
been  received  or  disbursed  and  paid."^     Since  that  time 

18  and  9  Vict.,  c.   16,   par.   115.    This  was   also   fully   implied 

112 


PROTECTION  OF  THE  CORPORATE  ESTATE 

this  has  been  accepted  as  a  primary  principle  of  British 
company  law.  The  general  injunction  was  repeated  and 
enlarged  npon  in  the  companies  act  of  1862.*  This  act 
required  a  full  account  not  only  of  receipts  and  disburse- 
ments but  also  of  assets  and  liabilities,  revenues  and  ex- 
penses, and  profit  and  loss. 

Early  Forms  of  Capital  Accounts. — If  accounts  are 
to  be  used  as  a  medium  for  the  current  collection 
of  evidence  necessary  to  the  protection  of  capital,  it 
would  seem  to  be  a  foregone  conclusion  that  a  definite 
classification  should  be  established  to  which  all  such  data 
must  be  related.  In  the  United  States  this  was  never  re- 
quired until  the  interstate  commerce  commission  began  to 
exercise  the  authority  conferred  upon  it  by  congress  in 
1906.  The  rules  prescribed  by  this  commission,  however,  do 
not  provide  for  two  capital  accounts,  nor  have  the  railroads 
established  such  accounts  for  their  own  information.  The 
British  companies  act  of  1862  evidently  had  such  an  end 
in  view,  but  the  framers  did  not  perceive  the  difference 
betM'een  capital  and  obligations  incurred  in  obtaining  capi- 
tal. The  balance  sheet  prescribed,  however,  did  require 
that  in  accounting  for  "property  and  assets"  the  cost 
should  be  stated  with  deductions  for  deterioration  in  value 
as  charged  to  the  reserve  fund  or  profit  and  loss.  The 
form  prescribed  for  stating  capital  liabilities  follows: 

I.     Capital   (showing) 

1.  The   number  of  shares 

2.  The  amount  paid  per  share 

3.  If  any  arrears  of  calls,  the  nature  of  the  ar- 

rear,  and  the  names  of  depositors 

4.  The  particulars  of  any  forfeited  shares. 

in  the  gas  works  clauses  act  of  1847    (10  and  11  Vict.  c.   15,  par. 
38)    and  in  tiie  water  works  clauses  act  of  the  same  year   (10  and 
11  Vict.  c.  17,  par.  83). 
2  25  and  26  Vict.,  c.  89,  sched.  1,  table  A,  par.  78. 
9  113 


RAILROAD  FINANCE 

II.     Debts  and  Liabilities  of  the  Company  (showing) 

1.  The  amount  of  loans  on  mortgages  or  debent- 

ure bonds 

2.  The  amount  of  debts  owing  by  the  company, 

distinguishing : 

a.  Debts  for  which  acceptances  have  been 

given 

b.  Debts  of  tradesmen  for  supplies  of  stock 

in  trade  and  other  articles 

c.  Debts  for  law  expenses 

d.  Debts  for  interest  on  debentures  or  other 

loans 

e.  Unclaimed  dividends 

f.  Debts  not   enumerated  above. 

III.  Reserve  Fund   (showing) 

1.     The  amount  set  aside  from  profits  to  meet  con- 
tingencies. 

IV.  Profit  and  Loss  (showing) 

1.     The   disposable  balance   for  payment  of  divi- 
dends. 
V.     Contingent  Liabilities 

1.  Claims  against  the  company  not  acknowledged 

as  debts 

2.  Moneys  for  which  the  company  is  contingently 

liable. 
In  1868  parliament  seems  to  have  had  a  clearer  view  of 
the  capital  account.     Among  the  forms  of  accounts  pre- 
scribed by  the  regulation  of  railways  act  ^  is  the  following : 

EECEIPTS    AND    EXPENDITURES    ON    CAPITAL    ACCOUNT 

Amount       Amount 
Expended  Expended   Total 
to  During 

Half  Year 
To  Expenditures — 

On    lines   open    for  traffic  ..•• 

3  31  and  32  Vict.,  c.   119,  sched.  1. 

114 


PROTECTION  OF  THE  CORPORATE  ESTATE 


On  lines  in  course  of  construction     . 
Working  stock 

Subscriptions  to  other  railways 
Docks,  steamboats  and  other  special 
items 

To  Balance 


Amount       Amount 
Received    IvPccived     Total 
to  During 

Half  Year 


By  Receipts — 

Shares  and  stock 
Loans 

Debenture  stock 
Sundries   (in  detail) 


More  Recent  Requirements  for  Statement  of  Capital. — 
This  form  of  account  had  the  advantage  of  correlating 
all  capital  receipts  and  capital  expenditures,  of  carrying 
forward  a  total  cost  of  capital  resources  to  date,  and  of 
showing  how  the  capital  was  procured.  The  gas  works 
clauses  act  of  1871,*  the  electric  lighting  act  of  1882,^  and 
subsequent  acts  have  somewhat  more  definitized  the  capital 
account,  and  carried  forward  the  results  in  forms  of  bal- 
ance sheets  required  by  law  as  more  specifically  defined  by 
the  board  of  trade. 

Defective  in  Form  hut  Adequate  in  Effect. — These  ac- 
counts, however,  are  still  lacking  in  that  they  are 
designed  to  show  original  cost,  reserves  for  deprecia- 
tion and  loss  being  set  up  in  another  place.  But  so  far 
as  the  subject  of  present  interest  is  concerned,  the  statutes 
of  Great  Britain  contain  provisions  for  the  collection  of 
all  the  evidence  necessary  to  the  protection  of  capital  in- 
vested in  railroad  and  other  corporate  enterprises.  They 
also  provide  for  other  evidence  necessary  to  the  enforce- 


434  and   35   Vict.,  c.   41,   sclied.   B. 

115 


6  45  and  4(i  Vict.,  c.  56. 


llAlLttdAt)  FINANCE 

ment  of  legal  principles  of  corporate  trusteeship,  such  as 
relations  of  current  asset  and  liability,  current  operative 
results,  profit  and  loss,   surplus,  dividends,   etc. 

Provisions  for  Independent  Verification  of  Statements. 
— The  possession  of  properties  and  funds  as  well  as  the 
keeping  of  accounts  are  necessarily  entrusted  to  officers 
and  employees  of  the  corporation.  For  this  reason  it  is 
important  that  legal  provisions  be  made  for  independent 
verification  of  facts  recorded  and  reported.  In  this  re- 
spect the  American  law  is  deficient;  and  again  we  must 
look  to  Great  Britain  for  an  example.  By  the  companies 
clauses  consolidation  act,  it  was  provided  that  "Except 
where  by  the  special  act  auditors  shall  be  directed  to  be 
appointed  otherwise  than  by  the  company,  the  company 
shall,  at  the  first  ordinary  meeting  after  the  passing  of 
the  special  act,  elect  the  prescribed  number  of  auditors, 
and  if  no  number  is  prescribed  two  auditors,  in  like  man- 
ner as  is  provided  for  the  election  of  directors.  .  .  . 
He  shall  not  hold  any  office  in  the  company,  nor  be  in  any 
manner  interested  in  its  concerns,  except  as  a  share- 
holder. .  .  .  The  directors  shall  deliver  to  such  audi- 
tors the  half-yearly  or  other  periodical  accounts  and  bal- 
ance sheet.  ...  It  siiall  be  lawful  for  the  auditors 
to  employ  sUch  accountants  and  other  persons  as  they  may 
think  proper,  at  the  expense  of  the  company,  and  thfey 
shall  either  make  a  special  report  on  the  said  accounts,  or 
simply  confirm  the  same. ' '  °  The  requirements  of  this 
and  other  early  British  acts  were  found  to  be  inadequate 
in  some  respects.  In  1862  the  compianies  act  made  the 
powers  and  duties  of  auditors  more  specific.  Auditor^ 
were  continued  as  the  independent  representatives  of  thfe 
company  appointed  by  the  shareholders.  As  a  matter  of 
organization  the  first  auditors  were  to  be  appointed  by  the 
directors,  but  all  subsequent  auditors  were  to  be  appointed 
6  8  and  0  Vict.,  c.  16,  par.   101-8. 

116 


PROTECTION  OF  THE  CORPORATE  ESTATE 

by  the  company  in  general  meeting.  It  was  made  as 
obligatory  to  appoint  independent  auditors  as  it  was  to 
elect  officers,  and  if  auditors  were  not  elected  in  the  man- 
ner prescribed,  it  was  made  the  duty  of  the  board  of  trade, 
on  application  of  not  less  than  five  shareholders,  to  appoint 
auditors  for  the  current  year  and  fix  their  remuneration. 
Auditors  were  required  to  examine  the  balance  sheet,  with 
the  accounts  and  the  vouchers  relating  thereto,  and  to 
make  a  report  to  the  shareholders  upon  the  accuracy  of  all 
statements  of  fact  contained  in  the  accounts.  Powers 
were  conferred  upon  the  auditors  to  have  furnished  to  them 
a  full  list  of  all  records.  Officers  were  required  to 
give  to  the  auditors  access  to  records  at  all  reasonable 
times,  and  in  ease  explanations  or  information  were  re- 
quested from  the  directors  or  officers,  the  auditors  were 
to  report  to  the  shareholders  whether  such  explanations 
and  information  had  been  satisfactory.'^ 

Verification  of  Capital  Account. — In  1867,  the  railway 
companies  act  provided  that  "No  dividend  shall  be  de- 
clared by  a  company  until  the  auditors  have  certified  that 
the  half-yearly  accounts  proposed  to  be  issued  contain 
a  full  and  true  statement  of  the  financial  condition  of  the 
company,  and  that  the  dividend  proposed  to  be  declared 
on  any  share  is  bona  fide  due  thereon  after  charging  the 
revenue  of  the  half  year  with  all  expense^  which  ought 
to  be  paid  thereout  in  the  judgment  of  the  auditors; 
.  .  .  and  the  auditors  may  examine  the  books  of  the 
company  at  all  reasonable  times,  an4  may  call  for  such 
further  accounts  and  such  vouchers,  papers,  and  inforn^a- 
tion,  as  they  think  fit,  and  the  directors  and  officers  of  the 
company  shall  produce  and  give  the  same  as  far  as  they 
can,  and  the  auditors  m?(y  refuse  to  certify  as  aforesaid 
until  they  have  received  the  same;  and  the  auditors  may 
at  any  time  add  to  their  certificate,  or  issue  to  the  sb^re- 
7  25  and  26  Vict.,  c.  89,  sched.   1,  table  A,  par.  83-93. 

117 


RAILROAD  FINANCE 

holders  indepeiitlently,  at  the  cost  of  the  company,  any 
statement  respecting  the  financial  condition  and  prospects 
of  the  company  which  they  think  material  for  the  informa- 
tion of  the  shareholders."  ^ 

Protection  of  Sliarcholder  and  Creditor,  tlic  Central 
Thought. — The  British  law  is  not  only  most  ample  in  re- 
quiring: of  corporate  trustees  that  a  full  and  true  record 
be  kept  of  all  transactions  reflecting  their  acts  and  re- 
sponsibility, and  that  an  independent  verification  be  made 
of  such  records,  but,  what  is  quite  as  essential  to  the  pro- 
tection of  shareholders'  and  creditors'  rights,  that  this 
evidence  when  collected  and  digested  shall  be  placed  in 
the  hands  of  the  beneficiaries  of  the  trust.  Furthermore, 
the  responsibility  of  the  author  for  the  truth  of  statements 
made  over  his  certificate  was  definitely  fixed  by  making 
him  personally  liable  to  fine  and  imprisonment  for  wilful 
false  certification.  The  companies  act  of  1862  provided 
that  "A  printed  copy  of  such  balance  sheet  shall,  seven 
days  previously  to  such  [regular]  meeting,  be  served  on 
every  member  [shareholder]."^ 

Statutory  Provisions  for  Preservation  of  Evidence. — 
Consideration  should  be  given  to  British  requirements  for 
the  protection  of  the  records  themselves.  Important 
among  these  is  the  larceny  act  of  1861,  which  provides  that 
whenever  a  director  of  any  body  corporate  shall,  with  in- 
tent to  defraud,  omit  to  make  a  full  and  true  entry  of  a 
transaction  by  which  any  of  the  property  of  the  company 
shall  be  diverted  to  an  improper  use,  shall  be  guilty  of  a 
misdemeanor.^"  And  again,  "If  any  clerk,  officer,  or  serv- 
ant, or  any  person  employed  or  acting  in  the  capacity  of 
tjlerk, 'officer  or  servant  shall,  wilfully  and  with  intent  to 
defraud,  destroy,  alter,  mutilate,  or  falsify  any  book,  pa- 

8  30  and  31  Vict.,  c.  127,  par.  30. 

8  25  and  2«  Vict.,  c.  89,  sched.   1,  table  A,  par.  82. 

10  24  and  25  Vict.,  c.  90,  par.  82-3. 

118 


PROTECTION  OF  THE  CORPORATE  ESTATE 

per,  writing,  valuable  security,  or  account  which  belongs 
to  or  is  in  possession  of  his  employer,  or  has  been  received 
by  him  for  or  on  behalf  of  his  employer,  or  shall  wilfully 
and  with  intent  to  defraud  make  or  concur  in  making 
any  false  entry  in,  or  omit  or  alter,  or  concur  in  omitting 
or  altering,  any  particular  from  or  in  any  such  book,  or 
any  document,  or  account,  then  in  every  such  case  the 
person  so  offending  shall  be  guilty  of  a  misdemeanor."" 
To  protect  the  shareholder  and  the  public  still  further 
against  misinterpretation  and  failure  of  duty  on  the  part 
of  corporate  trustees,  section  84  of  the  larceny  act  pro- 
vides: "Whosoever,  being  a  director,  manager,  or  public 
officer,  of  any  body  corporate,  or  public  company,  shall 
make,  circulate,  publish  or  concur  in  making,  circulating 
or  publishing,  any  written  statement  of  account  which  he 
shall  know  to  be  false  in  any  material  particular,  with  in- 
tent to  deceive  or  defraud  any  member,  shareholder  or 
creditor  of  such  body  corporate  or  public  company,  or 
with  intent  to  induce  any  person  to  become  a  shareholder 
or  partner  therein,  or  to  entrust  or  advance  any  property 
to  such  body  corporate  or  public  company,  or  to  enter  into 
any  security  for  the  benefit  thereof,  shall  be  guilty  of  a 
misdemeanor,"  the  penalties  therefor  being  as  above  set 
forth.  All  of  these  several  classes  of  legal  provisions  are 
frequent,  it  may  be  said  general,  in  American  statutes. 

THE    DOUBLE    BALANCE    SHEET    AS    AN    INSTRUMENT    FOR    PRO- 
TECTION OP  CAPITAL 

If  we  are  to  be  logical  in  our  concept  of  capital,  if  we 
are  to  construct  a  statement  of  the  resources  and  liabilities 
of  a  company  according  to  the  spirit  and  intent  of  the 
common  law  of  corporate  trusteeship  and  statute  law  re- 
straining the  officers  of  corporations  from  declaring  divi- 
dends out  of  capital,  we  must  look  upon  the  capital  funds 

IX  38  and  39  Vict.,  c.  24. 

119 


hailroad  finance 

atid  resources  as  a  part  of  the  estate  reserved  for  continu- 
ous or  permanent,  productive  use.  Following  good  ac- 
counting practice,  assets  which  are  reserved  for  a  definite 
use  should  be  set  up  as  a  separate  fund,  against  which  the 
obligation  creating  the  reservation  may  be  stated.  In  case 
of  trust  funds,  this  practice  is  universally  recognized. 
Capital  in  contemplation  of  law  is  a  trust  fund  in  the 
hands  of  the  officers. 

British  Laiv  Requires  Separate  Account. — In  American 
corporate  practice,  however,  the  capital  of  a  railroad  cor- 
poration has  not  been  treated  as  a  trust  or  reserve  fund, 
and  it  may  be  said  that  while  British  statute  law  has  re- 
quired for  capital  a  separate  account,  as  has  been  pointed 
out,  the  prescribed  form  of  accounting  is  not  wholly  con- 
sistent. The  form  of  capital  account  described  above  calls 
for  a  separate  statement  of  the  original  cost  of  capital 
resources,  opposed  to  -which  is  a  statement  of  the  several 
sources  from  which  the  capital  has  been  obtained.  The 
law  also  contemplates  that  all  proper  charges  against  rev- 
enue account  shall  be  set  up  in  the  determination  of 
profits,  and  as  a  condition  precedent  to  dividends,  but 
these  expense  charges  when  in  the  nature  of  depreciation 
reserves  and  losses  of  capital  due  to  casualty  and  unfore- 
seeable causes,  are  not  required  to  be  included  in  the  capi- 
tal account.  The  capital  receipts  and  expenditures  alone 
are  entered,  while  depreciation  reserves  and  capital  losses 
are  required  to  be  stated  in  the  consolidated  balance  sheet, 
where  they  are  entered  without  distinguishing  such  capi- 
tal reductions  from  current  assets  and  liabilities.  To  get 
at  true  results,  the  balance  sheet  must  be  analyzed  and  a 
new  capital  account  constructed. 

American  Practice  in  Violation  of  Pnnciples  of  Law.-^ 
American  practice  has  been  many  times  more  vicious  in 
that  in  most  railroad  financial  statements,  there  has  beeti 
no  attempt  to  distinguish  capital  resources  from  current 

120 


PROTECTION  OF  THE  CORPORATE  ESTATE 

I'esources,  and  there  has  been  no  regard  for  the  truth  even 
in  the  statement  of  the  amounts  and  sources  of  capital 
actually  obtained  by  the  corporation.  Common  law  prin- 
ciples of  trusteeship  and  statutes  for  the  protection  of 
capital  against  impairment  are  openly  violated  without 
any  fear  on  the  part  of  corporate  managers  of  their  being 
held  to  account.  In  many  instances  shareholders  are  as 
uninformed  after  reading  a  published  balance  sheet  as  if 
none  had  been  rendered.  Dividends  have  been  declared 
out  of  capital;  corporate  estates  have  been  wasted;  rail- 
roads have  been  reduced  to  bankruptcy  by  their  officers 
without  any  suggestion  either  in  accounts  or  reports  as  to 
the  facts.  And  while  this  was  being  done,  shareholders 
and  creditors  have  been  led  to  believe  that  the  corporation 
was  in  a  sound  financial  condition.  Corporate  estates 
have  been  managed  for  the  benefit  of  trustees;  published 
statements  have  been  used  for  the  manipulation  of  the 
stock  market  and  the  enhancement  of  private  fortunes 
through  stock  deals;  in  fact,  the  whole  purpose  of  one 
transportation  enterprise  after  another  has  been  subverted 
to  the  private  interests  of  those  who  were  in  possession 
and  who  alone  knew  the  facts.  Even  directors  have  been 
so  ignorant  of  the  true  state  of  affairs  that  the  officers 
have  been  permitted  to  act  in  open  defiance  of  public  law 
and  business  morality  for  years  without  even  arousing  a 
suspicion.  All  of  these  practices  have  been  made  possi- 
ble, not  by  reason  of  any  defects  in  the  principles  of  law 
by  which  corporate  trustees  may  be  held  to  strict  account, 
but  by  reason  of  lack  of  information  as  to  the  facts. 

Exact  Information  a  Primary  Necessity. — American 
shareholders,  creditors,  and  the  public  as  well  as  legis- 
lators have  failed  to  appreciate  the  importance  of  in- 
formation as  a  basis  for  judgment.  Until  there  is  a 
clear  perception  of  the  true  nature  of  the  capital  ac- 
count,   not   only   may   we   expect  that   American   capital 

121 


RAILROAD  FINANCE 

will  not  be  protected,  but  corporate  management  itself  may 
be  misled.  Officers  desirous  of  performing  their  full  duty 
toward  the  trust  in  their  hands  may  consent  to  the  wast- 
ing of  the  corporate  estate.  Without  a  true  statement  of 
capital  account,  corporate  administrators  may  not  only 
fail  to  protect  vested  interests,  but  all  their  calculations 
and  the  calculations  of  the  public  as  to  cost  of  operation, 
charges  at  which  service  may  be  profitably  rendered,  net 
returns  or  surplus  available  for  distribution  in  dividends, 
may  be  ill  founded;  and  steps  taken,  supposedly  in  the 
interests  of  the  corporation  or  of  the  public,  may  tend 
toward  ultimate  failure,  the  discredit  of  the  officers, 
and  the  impairment  of  the  property.  Until  we  arrive  at 
a  capital  account  which  will  protect  corporate  investments, 
we  may  not  hope  for  the  greatest  success  in  the  manage- 
ment of  the  great  undertakings  in  which  American  sav- 
ings have  been  embarked. 

Interstate  Commerce  Commission  Balance  Sheet. — Even 
those  who  have  been  most  vigorously  opposed  to  the  idea 
of  government  supervision  of  the  affairs  of  corporations 
must  concede  that  much  good  has  resulted  from  the  orders 
promulgated  by  the  interstate  commerce  commission  to 
govern  the  methods  by  which  railroad  corporations  shall 
keep  accounts  and  present  reports  of  financial  condition 
and  of  the  results  of  operation.  Until  1907  there  was  no 
standard  classification  of  assets  and  liabilities  and  no  uni- 
formity of  practice  in  accounting  and  reporting ;  each  rail- 
road employed  the  method  which  best  suited  its  officers. 
In  1909  and  1910  the  interstate  commerce  commission  pre- 
scribed a  form  of  general  balance  sheet.^^  In  the  prep- 
aration of  this  order  it  was  confronted  with  conditions 
which  made  it  difficult  to  reach  even  a  tentative  conclu- 
sion which  would  not  operate  with  undue  severity  upon 

12  Interstate  Commerce  Commission,  Form  of  General  Balance 
Sheet  as  Prescribed  for  Steam  Roads,  first  issue  1909,  first  revised 
issue  1910. 

122 


PROTECTION  OF  THE  CORPORATE  ESTATE 

one  or  another  of  the  corporations  concerned.  It  therefore 
invited  suggestions  from  interested  parties  in  order  to 
bring  out  all  the  factors  of  the  problem.  Upon  the  as- 
sumption that  the  subject  is  still  open  to  discussion,  it 
is  submitted  that  there  are  certain  essentials  to  good  judg- 
ment and  certain  definite  elements  which  are  yet  to  be 
taken  into  account  before  all  parties  in  interest  may  be 
supplied  with  the  basis  for  full  and  intelligent  considera- 
tion of  the  problem  of  management  of  the  estates  of  those 
corporations  which  are  charged  with  the  responsibilities 
of  public  carriers.  These,  it  is  further  submitted,  may  be 
best  supplied  through  the  double  balance  sheet,  the  pur- 
pose of  which  is  to  make  possible  a  showing  of  the  capital 
account  separate  and  distinct  from  the  statement  of  cur- 
rent or  working  assets  and  liabilities.  The  form  of  sum- 
mary consolidated  balance  sheet  is  offered  for  considera- 
tion as  a  means  by  which  the  essential  relations  of  capital 
and  non-capital  assets  and  liabilities  may  be  presented. 
(See  page  128.) 

This  outline  or  .summary  consolidated  balance  sheet  is 
expanded  to  include  all  of  the  items  prescribed  by  the  in- 
terstate commerce  commission  on  the  pages  following.  In 
venturing  such  a  re-arrangement  the  writers  are  conscious 
of  doing  violence  to  certain  accepted  theories.  Further- 
more, they  are  conscious  of  certain  inconsistencies.  These, 
however,  are  largely  due  to  certain  practices  which  have 
grown  up  in  American  railroad  accounting  and  financing 
in  violation  of  principles  of  good  management.  Good 
management  would  insist  on  a  strict  accounting  for  in- 
vested capital  and  the  protection  of  an  entrusted  estate — • 
an  estate  in  which  the  people  who  are  served  and  the  gov- 
ernment as  the  agency  of  general  welfare  have  quite  as 
much  at  stake  as  have  the  investor.  The  interests  of  all 
demand  that  ultimately  a  careful  account  be  kept  which 
will  enable  the  interests  of  public  and  investor  to  be  har- 
monized on  a  plane  of  equity  and  fair  dealing. 

123 


SUGGESTED  FORM  OF 
CAPITAL  ASSETS    (Investments   and   Funds) 

1.  Invested    capital     $81,000,000 

a.  Road    and    equipment    (cost)     ...$55,000,000 
Less     reserve     for     accrued     de- 
preciation         5,000.000  $50,000,000 

b.  Securities    (net    cost)     30,100,000 

1)  Pledged: 

a)  Proprietary,    afBliated,    and 

controlled    companies    20,000,000 

b)  Issued    or    assumed    10,000,000 

30,000,000 
?)  Unpledged: 

a)  Proprietary,    affiliated,    and 

controlled    companies    100,000 

c.  Other    Investments    (net    cost) . .  900,000 

1)  Advances    to    proprietary,    af- 

filiated,   and   controlled    com- 
panies'             100,000 

2)  Miscelllaneous     investments...        800,000 

a)  Physical  property. .  .$100,000 

b)  Securities    pledged..   400,000 

c)  Securities   unpledged  300,000 

2.  Capitalized   Fund   Resources    $19,000,000 

a.  For     working     capital      (provided 

for  by  issues  of  securities  and 
appropriations  from  surplus. — 
See  current   account)    11,500,000 

1)  Appropriated  from  proceeds  of 

securities    9,500,000 

2)  Appropriated  from  surplus....     2,000,000 

b.  For  construction  and  equipment.  500,000 

1)  Cash   100,000 

2)  Securities   400,000 

c.  For    additions    and    betterments.  500,000 

1)  Cash   50,000 

2)  Securities       of       company       in 

treasury 150,000 

3)  Work  in  progress  and  advances 

on   contracts  not  completed..        200.000 

4)  Security    deposits    100,000 

d.  For  insurance   1,000.000 

1)  Cash     100.000 

2)  Investments    *900,000 

e.  For  providence  to  employees 500,000 

1)  Cash     100,000 

2)  Investments    *400,000 

f.  For  sinking  fund   5,000,000 

1)  Cash     100,000 

2)  Investments    *4,900,000 

Total   capital    $100,000,000 


«  xotP — Of  the  capitalized  funds,  the  following  amounts  have  been 
invested  in  securities  issued  by  the  company:  (a)  the  insurance  fund, 
1860,000;  (b)  the  providence  fund,  $300,000;  (c)  the  sinking  funds,  54,- 
dOO.OOb;    total    $6,000,000.     For   details,    see   schedule. 


124 


CAPITAL  BALANCE  SHEET 

CAPITAL,  LIABILITIES  (Sources  from  which  Funds  Were  Obtained) 

1.  Obligations  to  creditors  for  capital: 

a.  Mortgage,    bonded    debt,    and    se- 

cured  debt    $34,500,000 

1)  Funded  debt  $36,300,000 

a)  Mortgage    bonds     $10,000,000 

b)  Collateral    trust    bonds 21.000.000 

c)  Revenue    bonds    2.000,000 

d)  E(]uipment  trust  obligations     2,000,000 

e)  Miscellaneous    funded    obli- 

gations         1,000,000 

f)  Receipts      outstanding      for 

funded  debt 300,000 

g)  Less     unextinguished     dis- 

count   on    securities 4,000,000 

h)  Unextinguished  premiums 
on  outstanding  funded 
debt    2,000.000 

2)  Receivers'    certificates   issued 

for     100,000 

a)  Construction      and      equip- 

ment      50,000 

b)  Additions    and    betterments  50,000 

3)  Matured  secured  liabilities  un- 

paid      100,000 

1)  Plain    bonds,    debentures,    and 

notes    4,000,000 

b.  Unsecured    credit    liabilities     6,100,000 

2)  Obligations   for   advances    1,000,000 

a)  Construction      and      equip- 

ment            500,000 

b)  Additions   and   betterments       500,000 

3)  Open    accounts    1,000,000 

a)  Construction      and      equip- 

ment            500,000 

b)  Additions   and    betterments        500,000 

4)  Matured    unsecured    liabilities 

unpaid     100,000 

2.  Obligations  to  shareholders  for  capital: 

a.  Capital     shares     issued      (amount 

Authotrized     $60.000.000) 41,000,000 

1)  Par  value  of  shares  issued   . .  50,000,000 

a)  Common    shares    20,000,000 

b)  Preferred  shares   20,000.000 

c)  Debenture   shares    5,000,000 

d)  Receipts      outstanding      for 

installments    paid 5,000,000 

2)  Less  discounts  on  shares  issued  10,000,000 
3^  Premiums   realized  on   sale  of 

shares    1,000,000 

b.  Appropriations     to     capital     from 

surplus   for    18,400,000 

1)  Construction   and  equipment    .  5,000.000 

2)  Additions    and    betterments...  4.900.000 

3)  Capitalized    reserves    8,500,000 

a)  Insurance    1,000,000 

b)  Providence   for    employees.  500,000 

c)  Sinking    funds    5,000,000 

d)  Working  capital    2,000,000 

8.  Temporary     advances     from     current 

account     000.000 

Total  obligations  for  capital  $100,000,000 

125 


SUGGESTED  FORM  OF 

CURRENT  ASSETS  AND  ITEMS  IN  SUSPENSE: 

1.  Available  for  payment  of  current  lia- 

bilities    ... $15,000,000 

a.  Cash     $  7,000,000 

1 )  Deposits  subject  to  draft $  5,900,000 

2)  Special        deposits        (working 

funds)     100,000 

3)  In     transit — agents    and     con- 

ductors             500,000 

4)  Working    funds     in    hands    of 

agents    400.000 

5)  Other  cash  and  cash  items...        100,000 

b.  Marketable  securities    6,000,000 

1)  Issues  in  treasury  for  work- 

ing   funds    5,000,000 

2)  Other     1,000,000 

c.  Credit  assets    2,000.000 

1)  Loans  and  bills  receivable 400,000 

2)  Traffic    and    car    service    bal- 

ances   due    from    other    com- 
panies            500,000 

3)  Net   balance    due    from    agents 

and    conductors    700,000 

4)  Temporary    advances    to    pro- 

prietary,   affiliated,    and   con- 
trolled  companies    100,000 

5)  Miscellaneous       accounts       re- 

ceivable            I'^O'OO" 

6)  Accrued   income   not   due    100,000 

7)  Other   current   accounts   avail- 

able to  meet  liabiUties  when 

due    100,000 

2.  Available   for  future   expenses  only..  „„„„««      2,000,000 

a.  Expense    advances 1- mn  aaa      i. """.""" 

1)  Rents  and  in.surance  prepaid..        500,000 

2)  Taxes   paid  in   advance    !2a'a2a 

3)  Other   expense   advances 100,000      ^  . . .  .„. 

b.  Materials    and    supplies    i,uuu,uuu 

3.  Temporary    advances    to    capital    ac-  ^^^  ^^^ 

count   •?  nno  oon 

4.  Debit  items  in  suspense d,uuj,uuu 

a.  Unaudited       and       undetermined 

claims    and    assets    accrued    or 
accruing    500,000 

b.  Properties    abandoned    chargeable 

to     operating    expenses 2,000,000 

c.  Other  suspense  or  deferred  debit 

items    500,000  ^ 

Total  current  assets  and  items  in  $20,000,000 


126 


CURRENT  BALANCE  SHEET 
CURRENT  LIABILITIES,  RESERVES,  AND  SURPLUS 

1.  Current  liabilities    $3,700,000 

a.  Due  and  payable    $  2,000,000 

1). Unmatured  interest,   dividends 

and    rents    paj'able $       100,000 

2)  Traffic    and    car    service    bal- 

ances  due    to   other   compan- 
ies             500,000 

3)  Audited     vouchers     and     com- 

pared wages    500,000 

4)  Working-      advances      due      to 

other    companies    400,000 

5)  Miscellaneous  accounts  payable        100,000 

6)  Matured  interest  dividends  and 

rents    payable    400,000 

b.  Maturing:  or  accrued  and  not  due  1,700,000 

1)  Loans    and    bills    payable 1,000.000 

2)  Taxes   accrued   and   not    due..         100,000 

3)  Unsettled  and  contested  claims 

and  liabilities   accrued  or  ac- 
cruing             500,000 

4)  Other    credit    items    100,000 

2.  Reserves   against   current   assets   and 

items  in  suspense   14,i*00.000 

a.  Operating   reserves    400,000 

b.  Working  capital   reserves    11,500.000 

1)  Appropriated   out   of  surplus..     2,000,000 

2)  Appropriated    out    of    proceeds 

of   sales    of   securities 9,500,000 

c.  Reserve   for    debit    items    in    sus- 

pense      3,000,000 

3.  Unappropriated   surplus 1.400,000 

Total   current   liabilities,    reserves, 

and  surplus    $20,000,000 


SUMMARY    CONSOLIDATED    BALANCE    SHEET 

CAPITAL  ACCOUNT 
ASSETS  $100,000,000 


1.     Invested   capital    $81,000,000 

Road  and  equipment    .  $;jO,000,000 
Securities     and     other 

investments     31,000,000 


2.     Capitalized    funds     19,000,000 


LIABILITIES  AND  RESERVES $100,000,000 


1.  Obligations  to  creditors  for  capital  $40,000,000 

Secured     $34,500,000 

Unsecured      0,100,000 

2.  Obligations    to    shareholders    59,400,000 

Subscribed   capital    . . .  41,000,000 
Appropriations    to   cap- 
ital from  surplus    . .   18,400,000 


CURRENT    ACCOUNT 
ASSETS  $  20,000.000 


1.     Available    for   payment   of   current 

liabilities     $15,000,000 

Cash    $  7.000.000 

Other   8,000.000 


2.  Available  for  future  expenses  only  .     2.000.000 

3.  Debit  items    in   suspense    3.000.000 


LIABILITIES  AND  RESERVES $  20.000.000 


1.     Credit    liabilities    $  3,700,000 

Due   and  payable    $  2,000,000 

Maturing    or    accrued, 
not    due    1,700,000 


2.  Reserves  against  current  assets  and 

items    in   suspense    $14,900,000 

3.  Unappropriated  surplus    1,400,000 


128 


CHAPTER  VIII 

FINANCIAL  CONSIDERATIONS   IN  MAINTENANCE   AND   AD- 
DITIONS    AND   BETTERMENTS 

Problems  of  Management. — The  three  primary  problems 
of  management  are  maintenance,  or  the  protection  of  capi- 
tal resources  from  the  effects  of  waste  and  of  wear  and  tear  ; 
operation,  or  the  use  of  the  organization  and  capital  re- 
sources so  as  to  return  to  the  corporation  the  largest  profit 
consistent  with  its  purposes;  and  distribution  of  surplus, 
or  the  appropriation  of  the  net  profits  of  operation  in  a 
manner  which  will  best  conserve  the  interests  of  all  par- 
ties concerned,  whether  to  increase  capital  resources  or  to 
make  a  return  to  the  shareholders  in  the  form  of  divi- 
dends. 

MAINTENANCE 

Elements  of  Maintenance. — The  principal  subjects  of 
administrative  responsibility  pertaining  to  maintenance, 
or  the  protection  of  the  corporate  estate,  are  displayed  as 
separate  items  in  the  form  of  balance  sheet  set  forth  in 
the  preceding  chapter.  These  subjects  are:  "road  and 
equipment";  "securities  of  other  corporations,"  whether 
proprietary,  controlled,  or  affiliated ;  ' '  investments  in 
properties  and  enterprises  not  directly  concerned  with 
transportation,"  and  "capitalized  funds."  From  the 
viewpoint  of  finance,  maintenance  has  to  do  with  expend- 
ing or  setting  aside  out  of  earnings  or  income,  amounts 
adequate  for  up-keep,  i.e.,  sufficient  to  preserve  the  integ- 
rity of  the  invested  capital  or  funded  estate.  From  the 
viewpoint  of  management,  maintenance  has  to  do  with 
determining  what  amounts  should  be  provided  for  each 
variety  of  property  or  capitalized  fund  representing  the 
10  129 


RAILROAD  FINANCE 

investment  or  funded  estate.  The  administrative  eonsid- 
erations  incident  to  the  protection  of  the  tirst  of  the  classes 
above  specified,  viz:  "road  and  equipment,"  fall  under 
two  general  classifications,  maintenance  of  way  and  struc- 
tures, and  maintenance  of  equipment.  The  cost  of  ])oth 
is  a  necessary  part  of  operating  expenses.  The  determin- 
ation of  maintenance  requirements  is  a  problem  of  great 
complexity,  on  account  of  the  number  and  variety  of  prop- 
erties which  must  be  considered.  Upon  its  managerial 
side,  maintenance  may  be  classified  under  the  heads,  "re- 
pairs," "replacements,"  and  "depreciation." 

Repairs  and  Replacements. — If  only  such  amounts 
should  be  withdrawn  from  revenues  as  are  needed  to  re- 
pair parts  which  have  become  broken  or  worn  out  in  serv- 
ice, the  capital  would  be  rapidly  depleted.  A  large  part 
of  the  wear  and  tear  incident  to  operation  cannot  be  re- 
paired. Every  train  which  passes  over  a  track  removes  a 
thin  film  of  steel  from  the  surface  of  the  rail.  Every 
stroke  of  the  locomotive  and  every  revolution  of  the  wheels 
contributes  to  the  gradual  wasting  of  the  property.  Rains 
and  droughts,  frosts  and  thaws  alike  have  a  disintegrat- 
ing effect  upon  the  materials  of  the  roadway,  structures, 
and  equipment.  When  the  property  is  kept  in  the  best 
current  repair  that  is  practicable,  there  is  still  much  to  be 
done.  Current  financial  provision  must  be  made,  there- 
fore, for  replacement  when  necessary,  whether  from  con- 
siderations of  safety  or  of  economical  operation. 

Depreciation. — In  order  that  the  wear  and  tear,  or  phys- 
ical deterioration  which  may  not  be  currently  repaired 
may  be  adequately  provided  for,  an  amount  sufficient 
finally  to  replace  the  property  in  its  original  condition 
may  be  set  aside  out  of  revenues.  This  may  take  the  form 
of  a  renewal  or  depreciation  fund,  against  which  renewals 
are  to  be  charged  when  made.  Such  a  fund,  if  adequate, 
should   cover   every    element   of    wasting    assets.     Patent 

130 


MAINTENANCE,  ADDITIONS,  BETTERMENTS 

rights  expire;  types  of  cars  and  locomotives  become 
antiquated;  bridges  and  tunnels  are  found  to  be  too 
small  to  accommodate  larger  and  heavier  trains.  Hence 
arises  the  necessity  of  setting  aside  out  of  current  reve- 
nues of  sufficient  funds  to  protect  the  capital  investment  and 
to  insure  safe  and  economical  operation  of  the  property. 

A  capital  account  which  shows  nothing  but  the  in- 
vested capital  as  represented  by  different  classes  of  prop- 
erties does  not  furnish  sufficient  information  for  the 
manager,  nor  does  it  permit  the  investor  to  judge  intelli- 
gently as  to  the  efficiency  of  the  management.  Actual 
estimates  based  upon  experience  should  be  prepared  to 
show  what  amounts  should  be  set  aside  or  expended  for 
maintenance.  There  should  be  property  records  and  main- 
tenance accounts  which  will  show  in  detail  the  experience 
of  a  period  of  years,  and  also  whether  these  estimated 
requirements  have  been  met ;  and  inspections  and  ap- 
praisals by  engineers  should  be  made  from  time  to  time 
to  correct  any  possible  errors  in  the  estimates.  If  any 
of  these  precautions  is  not  observed  or  if  the  method  of 
assembling  and  presenting  the  required  information  is 
unsatisfactory,  the  corporation  and  the  interest  of  the  in- 
vestor may  be  seriously  endangered. 

What,  under  the  interstate  commerce  commission  rules, 
is  called  "renewals  account,"  is  merely  an  adjustment 
account  to  which  is  charged  that  portion  of  the  capital  as- 
sets going  out  of  use  which  has  not  been  covered  by  the 
depreciation  charges  up  to  the  time  of  its  retirement.  To 
the  renewal  account  is  also  credited  any  amount  which 
may  be  received  as  salvage. 

Maintenance  of  Stihsidiary  Properties. — The  invest- 
ments in  securities  of  proprietary,  controlled,  and  allied 
corporations  also  should  be  fully  set  forth.  The  capital 
account  sliould  show  not  only  their  original  cost  but  also 
what  provision  has  been  made  for  extinguishing  any  dis- 

131 


RAILROAD  FINANCE 

count,  or  for  amortization  of  any  premium  on  bonds 
which  have  been  provided.  Shares,  whether  acquired 
above  or  below  par,  even  when  carried  at  cost,  cannot 
be  adequately  protected  unless  the  managers  of  the  in- 
vested estate  maintain  careful  watch  over  the  properties 
which  they  represent  and  over  the  manner  in  which  they 
are  operated.  Good  management,  also,  would  require  care- 
ful consideration  as  to  the  relative  advantage  of  retain- 
ing control  of  subsidiary  properties,  or  of  providing  like 
facilities  through  purchase  or  construction.  We  are  con- 
cerned with  the  asset  account  "other  investments,"  which 
in  the  interstate  commerce  commission  classification  com- 
prehends four  classes  of  property  investment:  (1)  ad- 
vances to  proprietary,  affiliated,  and  controlled  com- 
panies; (2)  investments  of  a  permanent  nature  in  phys- 
ical property  other  than  that  held  for  the  operation  of 
the  company's  property  as  a  transportation  agency;  (3) 
securities  of  companies  and  organizations  pledged  as  col- 
lateral;  and  (4)  securities  of  like  nature  which  are  held 
unpledged.  As  advances  to  controlled  companies  are  un- 
secured, there  is  need  for  care  that  those  companies  be 
protected  from  the  danger  of  foreclosure  by  secured  credi- 
tors. There  is  need  for  care,  also,  that  construction, 
equipment,  and  additions  and  betterments  financed 
through  advances,  shall  add  a  proper  amount  to  the  value 
of  the  subsidiary  property.  Investments  in  physical 
property  not  concerned  with  transportation — mines,  lands, 
industrial  plants,  etc. — should  be  made  with  the  same 
care  and  foresight.  When  such  properties  are  once 
purchased,  the  protection  of  the  investment  requires 
that  adequate  provision  be  made  out  of  revenues 
for  repairs,  replacements,  and  depreciation.  Manage- 
ment of  securities  pledged  as  collateral  requires  that  the 
margins  be  kept  up,  so  as  to  avoid  the  possibility  of  loss 
through  forced  sale.     Whether  securities  are  pledged  or 

132 


MAINTENANCE,  ADDITIONS,  BETTERMENTS 

unpledged,  ample  provision  should  be  made  for  the  amor- 
tization of  any  premium  or  the  extinguishing  of  any  dis- 
count on  the  bonds. 

Maintenance  of  Capitalized  Funds. — Management  of 
capitalized  funds  requires  that  attention  be  given  to  the 
setting  aside  out  of  revenue  or  the  funding  of  amounts 
sufficient  to  protect  the  company  from  accruing  obliga- 
tion for  which  reserves  are  made ;  also  to  the  investment 
or  use  of  these  funds  in  such  manner  that  they  may  not 
be  impaired.  There  are  several  classes  of  capitalized 
funds  maintained  by  a  railroad :  working  capital  funds, 
construction  and  equipment  funds,  funds  for  additions  and 
betterments,  sinking  funds,  employees'  insurance,  provi- 
dent, and  pension  funds,  and  property  insurance  funds. 

Working  Capital  Funds. — A  working  capital  fund  is 
an  amount  provided  or  appropriated  for  use  as  working 
assets  of  the  company.  A  full  account  of  investment 
would  suggest  that  the  trustees  appropriate  from  con- 
tributed capital  or  surplus  such  amount  as  might  be  used 
to  advantage  as  a  working  fund.  This  is  now  required  of 
bankers  under  the  national  bank  act,  tliereby  making  it 
necessary  that  the  officers  of  the  company  show  whether 
they  have  protected  the  working  capital  or  allowed  it  to 
become  impaired.  In  American  railroad  practice,  in 
fact  in  corporation  practice  generally  other  than  bank- 
ing, insurance,  and  trust  companies,  this  has  not  been 
done.  Assuming  a  distinct  funding  act  on  the  part 
of  a  board  of  directors,  and  assuming  that  a  separate  capi- 
tal account  is  kept,  not  only  would  the  capital  account 
show  the  amount  of  the  investment  to  be  accounted  for  as 
working  capital,  but  the  statement  of  current  assets  and 
liabilities  would  also  appear  in  such  form  of  statement 
as  to  show  all  parties  concerned  whether  the  fund  thus 
set  aside  is  being  currently  maintained.  To  determine 
the  status  of  working  capital,  it  would  be   necessary  to 

133 


RAILROAD  FINANCE 

show  not  only  cash  and  accounts  receivable  available  ror 
meeting  current  liabilities,  but  also  the  investment  repre- 
sented in  ''assets  available  for  future  expenses  only." 
With  current  assets  at  realization  value,  as  an  offset  to 
current  liabilities  and  reserves  including  the  working 
capital  reserve,  the  resulting  balance  would  show  either 
the  amount  of  surplus  available  for  further  capital  use 
or  for  dividends  or  the  amount  by  which  the  working  capi- 
tal has  been  impaired. 

Constrtictioji  and  Equipment  Funds. — A  capitalized 
fund  for  construction  or  equipment  may  be  created  from 
the  proceeds  of  sales  of  securities  or  by  appropriation 
from  free  surplus.  Without  definite  acts  of  appropria- 
tion and  without  a  capital  account,  the  management  of  the 
company  is  left  free  to  render  any  account  of  amounts 
available  which  may  best  suit  its  purpose.  When  such 
a  fund  is  created,  outlays  for  construction  or  for  equip- 
ment are  chargeable  against  it  so  long  as  a  balance  re- 
mains. The  protection  of  the  investment  lies  in  permit- 
ting only  such  charges  as  are  in  the  nature  of  new  con- 
stniction  or  new  equipment.  As  the  fund  is  depleted,  the 
capital  becomes  represented  in  the  road  and  equipment 
account. 

Funds  for  Additions  and  Betterments. — A  fund  for  ad- 
ditions and  betterments  is  of  the  same  character;  and  it 
may  be  created  in  like  manner  as  construction  and  equip- 
ment funds.  If  the  amount  chargeable  is  less  than  two 
hundred  dollars  for  any  improvement,  considered  as  a 
whole,  the  interstate  commerce  commission  allows  the  option 
of  charging  the  amount  expended  to  operating  expenses 
as  a  renewal  or  to  the  appropriate  account  under  addi- 
tions and  betterments.  This,  however,  does  not  apply  to 
right  of  way  and  station  grounds,  real  estate,  sidings  and 
spur  tracks,  terminal  yards,  or  fencing  right  of  way.^     In 

1  Interstate  Commerce  Commission,  Classification  of  Expenditures 
for  Additions  and  Betterments,  first  revised   issue,   1910:    18. 

134 


MAINTENANCE,  ADDITIONS,  BETTERMENTS 

practice,  definite  appropriations  are  seldom  made  to  thia 
fund,  and  before  the  new  classification  became  effective, 
each  railroad  management  accounted  as  it  chose  for  in- 
vestments of  this  sort. 

Sinking  Funds. — A  sinking  fund  is  a  fund  created  by 
setting  aside  out  of  assets  or  out  of  accumulated  profits, 
sums  of  money  to  provide  for  the  payment  of  all  or  a 
part  of  the  principal  of  a  debt.  This  may  be  done  either 
by  placing  stated  amounts  on  deposit  to  accumulate  at 
compound  interest,  or  by  paying  the  money  to  sinking 
fund  trustees,  thus  putting  the  fund  out  of  reach  of  the  di- 
rectors. A  sinking  fund  may  consist  of  either  cash  or 
securities.  Cash  on  deposit,  however,  will  yield  but  a 
low  rate  of  return.  It  is  customary,  therefore,  to  invest 
the  sinking  fund  in  securities,  sometimes  of  other  cor- 
porations but  usually  in  the  corporation's  own  securities, 
and  as  far  as  practicable  in  the  very  issue  of  bonds  for 
which  the  fund  is  created.  Investment  in  the  securities 
of  outside  corporations  involves  an  element  of  risk,  for 
the  yield  cannot  be  expected  to  be  as  great  except  at  the 
sacrifice  of  security.  The  method  of  purchasing  the  cor- 
poration's own  bonds  gives  absolute  assurance  of  security. 

Bonds  for  the  sinking  fund  may  be  purchased  upon  the 
open  market,  or  by  drawing  by  lot  at  a  price  specified  in 
the  mortgage.  One  method  tends  to  advance  the  market 
price  to  a  figure  at  which  purchase  may  be  possible  only 
upon  terms  which  are  not  to  the  advantage  of  the  fund; 
the  other  is  frequently  the  cause  of  hardship  to  the  in- 
vestor, because  it  tends  to  keep  the  market  price  down  and 
because  of  the  uncertainty  as  to  the  time  when  any  par- 
ticular bond  may  be  called  by  the  trustees.  Once  pur- 
chased, the  securities  may  be  canceled  and  thus  taken 
from  the  liabilities  of  the  corporation,  or  they  may  be 
held  by  the  sinking  fund,  in  which  case  the  sinking  fund 
receives  the  regular  installments  of  interest. 

As  a  railroad  i)roperty  is  permanent  in  character,  there 

135 


RAILROAD  FINANCE 

is  a  difference  of  opinion  as  to  whether  it  is  desirable  for 
a  railroad  corporation  to  adopt  a  sinking  fund  policy;  but 
for  those  corporations  which  have  not  shown  a  tendency 
to  maintain  a  high  standard  of  efficiency  through  liberal 
appropriations  out  of  earnings  for  permanent  improve- 
ments, there  can  be  little  question  that  this  indirect  but 
certain  method  of  providing  for  redemption  of  funded 
indebtedness  will  serve  to  strengthen  credit. 

There  is  a  close  relation  between  sinking  fund  and  de- 
preciation. The  maintenance  of  a  sinking  fund  is  gen- 
erally considered  as  practically  equivalent  to  a  deprecia- 
tion charge.  If,  therefore,  a  corporation  provides  both 
for  a  sinking  fund  against  its  bonds  and  for  charges  for 
depreciation  of  the  properties  representing  those  bonds, 
the  net  result  is  the  same  as  if  an  appropriation  had  been 
made  each  year  to  increase  the  capital  surplus  by  the 
amount  of  the  sinking  fund  increment,  instead  of  leaving 
the  amount  as  unappropriated  profit  to  be  distributed  in 
dividends.  This  tends  to  conservatism  upon  the  part  of 
the  management. 

Employees'  Insurance,  Pension,  and  Provident  Funds. — 
Many  American  railroads  have  established  insurance  sys- 
tems and  pension  systems  for  the  benefit  of  their  employees, 
and  a  few  have  established  employees'  savings  institutions. 
These  two  classes  of  provident  funds  should  be  carefully 
distinguished ;  the  first  is  in  the  nature  of  an  appropriated 
capital  fund  of  the  company,  established  to  give  continu- 
ance and  stability  to  a  policy  which  aims  to  encourage 
employees  to  continue  in  the  service  of  the  road,  and 
to  protect  the  road  against  unusual  and  uneven  charges 
in  the  execution  of  this  policy;  the  second  is  in  the 
nature  of  a  trust ;  to  be  held  as  such ;  to  be  set  apart 
and  not  considered  as  a  part  of  the  capital  of  the 
road.  As  payments  and  deposits  are  received  from  em- 
ployees, a  separate  trust  would  be  set  up,  witli  respect  to 

136 


MAINTENANCE,  ADDITIONS,  BETTERMENTS 

which  the  management  would  be  held  responsible  under 
the  law  of  trusteeship.  The  capitalized  fund  created  by  the 
company,  however,  would  give  much  wider  latitude  to 
administrative  discretion.  Either  of  these  funds  may  be 
managed  by  a  board  of  trustees  chosen  for  the  purpose, 
in  some  cases  by  the  employees  and  in  others  jointly  by 
the  employees  and  the  board  of  directors  of  the  railroad.^ 
In  the  case  of  the  company  provident  fund,  the  money 
thus  set  aside  may  be  invested  and  payments  made  out  of 
accumulations  of  interest  only,  or  the  fund  may  be  treated 
as  an  insurance  or  pension  reserve.  The  annual  cost  of 
administering  such  a  funding  system  is  borne  in  some 
cases  by  the  railroads  as  a  part  of  regular  operating  ex- 
penses; in  others  by  the  funds  themselves.  Investment  is 
usually  made  in  securities  of  the  particular  railroad  con- 
cerned, for  reasons  already  given  in  the  discussion  of 
sinking  fund  investments.  Pension  funds  are  usually 
financed  wholly  by  contributions  or  appropriations  from 
the  earnings  of  the  company,  and  as  a  matter  of  policy 
the  employees  have  no  part  in  their  control.  Further- 
more, while  in  some  cases  the  funds  are  set  aside  as  invest- 
ments and  supplemented  when  necessary,  in  many  others 
they  are  maintained  wholly  by  regular,  annual  appropria- 
tions, which  are  also  charged  to  operating  expenses.  In 
the  latter  case  the  stability  of  the  funds  is  measured  by  the 
credit  of  the  corporation  as  a  whole,  and  not  by  bonds 
or  liens  on  specific  properties.  In  effect,  therefore,  by 
this  method  the  funds  are  carried  in  the  form  of  added  in- 
vestment in  the  general  assets  of  the  company  itself, 
against  M'hicli  is  set  up  a  reserve.  As  such  they  may  be 
made  to  produce  larger  returns  than  could  be  obtained 
with  safety  through  investment  in  securities.  The  drain 
upon  the  railroad  is  therefore  correspondingly  less. 

2  Commissioner  of  Labor,  Annual  report,  1908,  "Railroad  Relief 
Funds,"  271-383;  Riebenack,  "Railway  Provident  Institutions," 
rhiladt'ipliiu.      (1905.) 

137 


RAILROAD  FINANCE 

Property  Insurance  Funds. — Considerations  similar  to 
those  which  have  been  advanced  with  reference  to  pension 
funds  apply  to  those  funds  which  some  railroads  have  es- 
tablished for  carrying  insurance  upon  their  property, 
whether  to  the  exclusion  of  all  outside  insurance  or  in  addi- 
tion to  such  protection.  The  general  theory  is  that  as  a 
railroad  owns  so  many  widely  separated  properties,  by  set- 
ting aside  an  amount  each  year  to  cover  the  risk  of  destruc- 
tion by  fire,  flood,  and  the  elements,  it  may  insure 
itself  much  more  cheaply  than  if  the  insurance  were  pur- 
chased, thereby  distributing  any  extraordinary  loss  over  a 
series  of  years. 

ADDITIONS  AND   BETTERMENTS 

Definition. — Adopting  the  definition  formulated  by  the 
interstate  commerce  commission,  additions  and  betterments 
comprehend  "additional  land,  buildings,  structures,  and 
facilities,  not  taking  the  place  of  any  property  of  like  pur- 
pose previously  held  by  the  accounting  carrier ;  the  cost  of 
newly  acquired  equipment;  the  cost  of  improving  land, 
buildings,  structures,  facilities,  and  equipment  by  addi- 
tions thereto  not  involving  the  replacement  of  the  property 
improved;  the  excess  cost  of  improving  buildings,  struc- 
tures, or  facilities  (except  land  and  equipment)  over  the 
cost  of  replacing  in  kind  structures  and  facilities  of  like 
purpose  demolished,  abandoned,  or  withdrawn  from  ser\'ice ; 
and  the  necessary  credits  to  represent  property  abandoned, 
sold,  or  otherwise  retired  from  service."^ 

The  economic  motive  for  providing  funds  for  additions 
and  betterments  is  the  desire  to  increase  net  earnings. 
The  circumstances  giving  rise  to  the  demand  is  inadequacy 
of  facilities  for  handling  traffic  by  the  company  seeking 
funds  and  the  danger  of  competition  by  other  companies 

3  Interstate  Commerce  Commission,  Classification  of  Expenditures 
for  Additions  and  Betterments,   first  revised   issue,   1910:    13-4. 

138 


MAINTENANCE,  ADDITIONS,  BETTERMENTS 

which  may  be  attracted  to  the  field,  or  which  being  within 
the  field  and  better  equipped,  may  offer  to  perform  serv- 
ices at  a  lower  rate  of  cost.  The  initial  capitalization  of 
practically  all  railroads,  however  ample  it  may  have  been 
considered  in  particular  instances,  has  been  found  to  be 
insufficient  to  provide  for  means  necessary  to  meet  the 
increasing  demands  of  traffic. 

Reduction  of  Operating  Expenses. — There  has  been  a 
constant  tendency,  especially  marked  in  the  last  twenty 
years,  toward  the  use  of  cars  of  greater  capacity  and  an 
increase  in  the  number  of  cars  per  train.  The  introduc- 
tion of  heavier  equipment  has  necessitated  the  purchasing 
of  locomotives  of  greater  power  and  the  reconstruction  of 
roadway  and  structures.  Bridges  have  been  rebuilt, 
trestles  filled  in,  miles  of  road  ballasted,  and  tracks  re- 
laid  with  rails  of  greater  weight.  Long  sections  of 
original  roadway  have  been  abandoned  for  new  locations 
in  order  that  steep  grades  and  excessive  curves  might  be 
eliminated.  As  a  result,  the  ratio  of  paying  traffic  per 
car  and  per  train  has  been  greatly  increased,  and  eco- 
nomical operation  has  been  facilitated.  A  locomotive 
which  formerly  wasted  much  of  its  power  in  pulling 
a  light  train  up  and  around,  may  now  earn  a  larger 
revenue  because  it  can  pull  a  heavier  train  along.  The 
importance  of  the  subject  has  been  universally  recognized ; 
and  the  statutes  now  generally  authorize  the  exercise  of 
the  right  of  eminent  domain  and  the  increase  of  capitaliza- 
tion to  provide  for  improvements  and  extensions. 

Notable  Changes  Effected  hy  Harriman. — While  all  rail- 
roads have  l)een  engaged  in  work  of  this  nature,  the  Union 
Pacific  may  be  cited  as  one  which,  within  little  more  than 
a  decade,  has  been  largely  rebuilt.  As  it  was  originally 
subsidized  by  the  mile  and  built  by  construction  company 
methods,  there  was  little  incentive  for  its  builders  to  choose 
a  direct  course,  or  to  construct  anything  but  the  cheapest 

139 


RAILROAD  FINANCE 

sort  of  road.  Under  the  Ilarriman  regime  the  maximum 
grade  was  reduced  from  ninety-four  to  forty-four  feet  to 
the  mile,  long  trestles  were  replaced  by  solid  embankments, 
and  new  equipment  was  added.  Other  improvements  are 
now  being  effected.  The  Lucien  eut-oif  on  the  Central 
Pacific  is  one  of  the  most  remarkable  examples  of  better- 
ment work  in  the  world.  Instead  of  following  in  a 
circuitous  course  the  northern  margin  of  the  Great  Salt 
Lake,  the  track  now  extends  across  the  water  on  fills  and 
trestles.  The  operative  result  of  this  may  be  appreciated 
from  tlie  fact  that  by  the  building  of  103  miles,  there  have 
been  eliminated  forty-four  miles  of  distance,  1515  feet  of 
vertical  climbing,  and  3919  degrees  of  curvature — equiva- 
lent to  more  than  ten  complete  circles. 

Capitalization  of  Improvements. — In  England  the  in- 
vestor's demand  for  protection  of  his  interests  and  for  com- 
prehensive reporting  of  facts  pertaining  to  railroad  prop- 
erties and  their  management  have  materially  influenced 
both  corporation  law  and  practice.  Railroad  managers  in 
presenting  accounting  statements  were  early  required  to 
discriminate  with  exactness  between  expenditures  properly 
chargeable  against  capital  funds  and  those  which  might 
be  properly  applied  to  operating  expenses.  As  a  means  of 
making  these  requirements  effective,  the  English  law  re- 
quires that  the  accounts  be  audited  by  accountants  chosen 
by  the  shareholders  and  responsible  solely  to  them.  The 
accounts  must  show  how  the  money  for  capitalized  expen- 
ditures is  obtained ;  whether  through  the  issue  of  shares, 
bonds,  or  short  term  notes,  or  by  appropriations  from  sur- 
plus. Information  concerning  additions  and  betterments 
presented  in  this  manner  has  given  the  investor  a  clear 
insight  into  the  affairs  of  the  corporation,  and  it  has  kept 
before  the  management  the  necessity  of  maintaining  a 
conservative  attitude  toward  the  finances. 

In    America    the    practice   has   been   entirely    different. 

140 


MAINTENANCE,  ADDITIONS,  BETTERMENTS 

Until  within  recent  years  the  real  investor  has  been  kept 
in  the  background  because  of  the  activity  of  shareholders 
whose  chief  concern  was  the  development  of  local  trans- 
portation facilities  or  the  control  by  shareholders  of  an- 
other class  whose  primary  interest  lay  in  the  stock  market. 
In  cases  where  state  and  local  governments  have  held  rail- 
road shares,  the  public  officials  have  interested  themselves 
but  little  in  the  details  of  management  so  long  as  the  de- 
mands of  local  traffic  have  been  met.  As  a  result,  the 
quality  of  the  management  has  reflected  the  attitude  of  the 
less  conservative  among  the  shareholders.  It  has  been  the 
practice  to  pay  dividends  whenever  possible,  and  to  strive 
at  the  same  time  to  make  a  good  showing  in  the  financial 
reports.  The  situation  has  been  complicated  by  the  fact 
that  shareholders  have  been  unwilling  to  increase  their 
investment,  and  also  by  the  fact  that  all  railroads  have 
been  under  the  necessity  of  constantly  bringing  the  physi- 
cal condition  of  their  property  up  to  higher  standards, 
notwithstanding  the  fluctuations  in  earnings  corresponding 
to  periods  of  general  business  activity  and  depression. 
Under  these  circumstances  arose  the  common  practice  of 
failing  to  distinguish  between  expenditures  for  operation 
and  maintenance  on  the  one  hand  and  additions  and  bet- 
terments on  the  other.  Each  railroad  adopted  whatever 
policy  seemed  advisable,  and  none  has  consistently  fol- 
lowed any  one  policy  through  a  long  period.  Additions 
and  betterments  add  to  capital  assets;  and  recognition  of 
this  fact  is  necessary  for  the  intelligent  consideration  of 
questions  involving  the  relations  of  earnings  to  expenses 
and  of  net  earnings,  surplus,  and  dividends  to  capital  in- 
vestment and  to  public  service.  No  good  purpose  can  be 
accomplished  by  hiding  increases  of  capital  assets  by 
means  of  charges  for  additions  and  betterments  out  of  cur- 
rent earnings. 
Need  for  Additional  Protection  to  Investors. — If  addi- 

141 


RAILROAD  FINANCE 

tions  and  betterments  are  to  be  provided  for  by  means  of 
issues  of  bonds  or  of  shares  or  by  means  of  appropriations 
from  surplus  and  considered  as  increasing  the  assets,  it  is 
of  practical  importance  to  determine  what  expenditures 
are  for  maintenance  and  what  are  for  additions  and  bet- 
terments. If  they  are  to  be  made  without  resort  to  issues 
of  bonds  or  of  shares,  the  amount  so  expended  appearing 
as  a  direct  charge  against  surplus  will  not  be  declarable  in 
dividends,  for  by  showing  the  amount  of  surplus  so  appro- 
priated, a  hidden  surplus  becomes  impossible.  Expendi- 
tures for  additions  and  betterments  which  are  charged  out 
as  expenses  leave  all  intelligent  consideration  of  this  im- 
portant question  to  operating  heads ;  in  many  instances  all 
knowledge  of  the  facts  is  confined  to  them.  A  correct 
method  of  accounting  and  reporting  brings  these  matters 
to  the  attention  of  the  board  of  directors,  and  makes  nec- 
essary the  report  of  such  expenditures  as  result  in 
an  increase  in  the  corporate  estate.  From  the  point  of 
view  of  technique,  the  difference  in  the  method  of  account- 
ing may  seem  to  be  of  small  importance,  but  it  may  be  of 
highest  significance  from  the  point  of  view  of  administrative 
and  investment  judgment.  A  correct  method  of  reporting 
may  change  the  entire  attitude  of  the  investor  toward  the 
management.  A  proper  appreciation  of  the  facts  may 
change  the  attitude  of  the  public  and  of  national  and  state 
governments  toward  the  corporation ;  it  may  make  pos- 
sible the  payment  of  dividends  however  large  when  they 
are  actually  earned,  and  prevent  the  establishment  of  a 
hidden  surplus  which  might  be  used  for  purposes  of 
manipulation  to  the  detriment  of  the  interest  of  the  in- 
vestor. 

Surcharged  Maintenance  Accounts. — Many  railroad  man- 
agers have  made  it  a  practice  to  pay  regular  dividends,  and 
to  keep  to  themselves  the  essential  facts  concerning  the 
corporation.     When   revenues   were   large   they   expended 

142 


MAINTENANCE,  ADDITIONS,  BETTERMENTS 

large  amounts  in  rehabilitating  the  property,  and  charged 
them  to  expenses.  "When  revenues  were  small,  they  re- 
duced such  expenses  to  a  minimum.  Railroad  officials 
differ  as  to  the  best  policy  of  reducing  expenses  under 
such  conditions.  Some  claim  that  by  maintaining  equip- 
ment at  a  high  standard  of  efficiency,  even  at  the  expense 
of  the  roadbed,  a  railroad  will  be  best  prepared  to  take 
advantage  of  the  first  improvement  in  business.  Others 
maintain  that  it  is  unprofitable  to  spend  money  upon  re- 
pairs to  idle  equipment,  but  extremely  necessary  to  keep 
up  the  permanent  way;  for  with  a  rush  of  new  business 
it  is  difficult  to  repair  roadbed,  track,  and  bridges  which 
have  been  allowed  to  run  down.  By  this  method  it  has 
been  possible  to  maintain  regular  dividend  payments.  In 
justification  of  this  practice  the  argument  has  been  ad- 
vanced that  there  can  be  no  adequate  judgment  as  to 
what  may  constitute  a  standard  of  efficiency  of  any  given 
railroad  without  thorough  consideration  of  the  circum- 
stances affecting  other  lines  similarly  located,  and  that 
it  should  be  left  to  the  management  to  determine  whether 
specific  expenditures  should  be  considered  and  charged 
as  maintenance  or  as  additions  and  betterments.  But  ac- 
cepting the  statement  of  fact,  the  conclusion  does  not 
necessarily  follow.  While  competing  lines  must  have 
facilities  for  meeting  competition  as  well  as  for  serving 
the  public,  this  is  no  good  reason  for  concealing  from  trus- 
tees and  investors  the  facts  as  to  capital  cost,  and  the  re- 
turns to  be  expected  from  their  investment.  Fluctuations 
in  earnings  have  also  been  urged  as  an  argument  against 
carrying  depreciation  accounts  as  an  element  of  expense 
on  the  one  hand,  and  on  the  other,  as  an  argument  for 
charging  additions  and  betterments  to  expenses.  Again 
the  facts  as  stated  may  be  true;  there  may  be  wide  fluc- 
tuation in  earnings.  But  this  does  not  warrant  the  con- 
clusion that  for  this  reason  the  management  should  pro- 

143 


RAILROAD  FINANCE 

vide  for  the  payment  of  dividends  by  failing  to  meet  ex- 
penses, which  means  payment  of  dividends  out  of  capital, 
or  by  hiding  a  surplus  out  of  which  dividends  may  be  paid 
without  interruption.  The  net  result  of  these  methods  is 
to  provide  for  additions  and  betterments  out  of  surplus 
without  showing  the  facts  to  investors,  and  conversely,  to 
pay  dividends  out  of  a  hidden  reserve,  or  where  there  is 
no  such  reserve,  out  of  capital,  basing  such  action  upon 
facts  known  only  to  those  in  the  company's  management. 

Tendency  to  Abuse. — The  Southern  Pacific  was  managed 
in  this  manner.  Beginning  in  1906,  a  dividend  was  de- 
clared for  the  first  time  upon  the  common  shares,  and  this 
dividend  was  paid  out  of  "betterments  and  additions 
charged  to  income  account  in  the  years  1898,  1899,  1900, 
and  1901."  Of  like  order,  but  on  a  more  colossal  scale, 
was  the  spectacular  revision  of  the  Chicago  and  Alton  ac- 
counts in  the  reorganization  of  1900,  when  the  records 
of  the  company  were  entirely  recast,  and  every  item  for 
extraordinary  expenditures  which  had  been  previously 
charged  into  the  operating  account  and  thus  carried  as  a 
hidden,  invested  surplus  was  made  available  in  surplus 
for  dividend  distribution.  The  aggregate  of  such  charges, 
which  were  in  the  nature  of  secret  appropriations  from 
surplus,  was  found  to  be  over  $12,000,000  during  a  period 
of  thirty-five  years ;  and  upon  the  basis  of  this  showing, 
about  half  of  the  amount  was  distributed  as  an  extra  cash 
dividend  to  the  small  financial  group  which  had  acquired 
control.  Such  operations  have  been  made  impossible  by 
the  provision  in  the  Hepburn  act  of  1906  which  gave  to 
the  interstate  commerce  commission  power  to  enforce  its 
regulations  and  to  require  companies  to  furnish  annual  re- 
ports which  shall  show  in  detail  "the  amounts  expended 
for  improvements  each  year,  how  expended,  and  the  char- 
acter of  such  improvements."  Under  the  new  system,  the 
reports  must  show  the  exact  location  of  the  property. 

Every  railroad  has  expenditures  which,  while  not  eon- 

144 


MAINTENANCE,  ADDITIONS,  BETTERMENTS 

cei-ned  with  operation  or  maintenance,  add  little  to 
earning  power.  Safety  appliances,  block  signals,  im- 
provements to  station  grounds  and  buildings,  call  for  large 
sums,  yet  they  yield  no  measurable  return.  For  this 
reason  it  is  sometimes  claimed  that  they  should  not  be 
considered  as  additions  to  property,  and  capitalized.  If  it 
be  assumed  that  they  come  within  the  definition  of  addi- 
tions and  betterments,  it  is  apparent  that  if  capitalized 
they  tend  only  to  reduce  slightly  the  potential  net  earn- 
ings on  the  investment  as  a  whole.  To  hide  silch  expendi- 
tures in  costs  of  operation  or  of  maintenance  does  not  alter 
the  fact,  and  it  can  serve  no  good  purpose,  from  the 
standpoint  of  the  management,  the  investor,  or  the 
public. 

Reserve  Account  for  Extraordinary  Expenditures. — 
Much  betterment  work  is  of  a  sort  which  cannot  be  fore- 
seen; therefore  expenditures  on  this  account  at  times  may 
be  so  large  as  to  threaten  the  solvency  of  a  weak  company. 
Floods  may  destroy  large  sections  of  roadway  or  carry 
off  equipment  and  valuable  waterfront  property,  the  im- 
mediate effect  being  to  decrease  capital  assets,  reduce  the 
surplus,  or  increase  the  deficit.  Immediate  replacement  in 
such  an  event  cannot  be  considered  as  chargeable  to  ex- 
pense. If  not  provided  for  by  new  capital  subscription 
(new  capital  to  take  the  place  of  that  which  has  been  lost) 
the  restoration  may  be  gradual  by  appropriation  from  sur- 
plus, or  by  appropriation  from  net  income,  if  the  sur- 
plus has  been  wiped  out  and  the  corporation  is  operat- 
ing with  a  deficit.  The  capital  loss  may  thus  be  gradually 
replaced  and  its  replacement  apportioned  over  a  series  of 
years  without  appeal  for  new  subscriptions,  and  without 
resort  to  bond  issues. 

Legislatures  may  require  the  elimination  of  grade  cross- 
ings or  railroad  commissions  may  require  reconstruction 
of  condemned  property  or  the  adoption  of  special  facili- 
ties, an  increase  which  must  be  regarded  as  in  the  nature 
n  145 


RAILROAD  FINANCE 

of  capitalization  whatever  the  means  of  financing.  Ordi- 
nary business  foresight,  therefore,  wouUl  dictate  the 
financing  of  extraordinary  expenditures  of  this  nature  in 
such  a  manner  as  would  be  suggested  or  required  for  capi- 
tal funding,  with  due  regard  for  repairs,  replacements., 
and  depreciation  as  charges  against  the  reserve  of 
present  and  future  years.  To  this  end  it  is  the  practice 
of  many  railroads  to  deduct  from  the  net  income  of  each 
year  an  amount,  arbitrarily  determined  by  the  directors, 
which  is  appropriated  toward  a  reserve  fund  against 
which  capital  replacements  and  permanent  improvements 
may  be  charged.  In  some  cases  one  reserve  fund  is  main- 
tained for  additions  and  betterments  to  way  and  struc- 
tures and  another  for  the  acquisition  of  additional  equip- 
ment, but  many  railroads  provide  for  expenditures  of 
both  sorts  out  of  a  single  reserve.  Few  companies,  how- 
ever, follow  the  practice  of  the  Chicago,  Milwaukee,  and 
St.  Paul,  which  makes  provision  for  financing  such  ex- 
penditures by  maintaining  a  cash  fund  on  special  deposit. 
Variation  in  Practice  Among  Representative  Roads. — 
There  is  much  variation  in  the  methods  followed.  The 
Great  Northern,  in  order  not  to  surcharge  operating  ex- 
penses, has  always  made  scant  provision  for  maintenance, 
but  it  has  appropriated  large  amounts  from  net  income 
to  a  betterment  fund.  The  Pennsylvania  maintains  a 
large  fund  for  extraordinary  expenditures,  but  in  some 
years  it  has  also  charged  off  from  surplus  large  amounts  for 
replacements  and  additions  to  property.  Some  railroads, 
notably  the  Delaware  and  Hudson,  and  the  Delaware, 
Lackawanna,  and  Western,  provide  for  practically  all  such 
expenditures  by  means  of  direct  charges  against  the  sur- 
plus. All  of  these  practices  are  based  on  arbitrary  dis- 
cretion instead  of  strict  definition  of  additions  and  better- 
ments, and  most  of  them  have  resulted  in  the  arbitrary 
writing  down  of  the  investment. 

146 


MAINTENANCE,  ADDITIONS,  BETTERMENTS 

Direct  Charges  Against  Surplus. — Some  railroads,  par- 
ticularly those  which  are  parts  of  large  systems,  have  fol- 
lowed the  practice  of  charging  against  current  earnings 
not  only  such  items  as  should  be  treated  as  additions  and 
betterments,  but  also  many  which  should  be  capitalized. 
That  this  is  unfair  to  the  shareholder  is  obvious;  for  it 
burdens  the  earnings  unduly,  and  may  interfere  with  the 
payment  of  dividends  when  dividends  are  earned.  It  may 
be  safely  assumed  that  it  is  of  little  or  no  interest  to  the 
ordinary  shareholder  that  the  property  in  which  he  has 
an  interest  is  steadily  becoming  more  valuable,  or  that  his 
investment  is  menaced  by  appropriations  from  surplus,  if 
he  does  not  share  in  its  prosperity  by  regularly  participat- 
ing in  dividends.  But  the  shareholder  often  has  had 
no  way  of  knowing  whether  earnings  were  sufficient  to  pay 
dividends,  for  he  has  been  given  only  such  details  of  ex- 
penditures as  the  directors  have  chosen  to  publish.  The 
query  of  Collis  P.  Huntington,  as  to  why  the  shareholders 
of  the  Pacific  Mail  should  care  whether  they  received  their 
dividends  in  money  or  in  ships  may  here  be  cited  as  ex- 
ceptional in  foresight,  but  it  does  not  justify  the  attitude 
of  proprietorship  which  railroad  presidents  have  often  as- 
sumed in  dealing  with  matters  concerning  which  their 
shareholders  have  had  a  right  to  the  fullest  knowledge. 
Minority  shareholders  in  subsidiary  railroads  have  often 
had  cause  to  believe  that  operating  expenses  have  been 
excessively  charged  with  expenditures  for  additions  and 
betterments.  While  they  are  entitled  to  dividends  of  only 
such  amount  as  may  be  set  aside  for  distribution,  they 
have  been  without  access  to  information  as  to  the  amount 
of  surplus  which  may  have  been  expended  for  additions 
and  betterments,  and  such  information  is  essential  to  any 
estimate  of  the  investment  value  of  shares. 

The  New  Official  Classification  of  Accounts. — The  ac- 
counting rules  of  the  interstate  commerce  commission  now 

147 


RAILROAD  FINANCE 

require  that  carriers  shall  keep  an  account  for  additions 
and  betterments.  This  account  is  divided  into  thirty-five 
primary  accounts,  one  of  which  is  concerned  Mith  interest 
and  commissions  on  securities  issued  to  provide  for  addi- 
tions and  betterments,  while  the  others  relate  to  the  vari- 
ous properties  affected. 

Provision  Against  Understatement  of  Operating  Ex- 
penses.— As  has  been  explained  by  Doctor  Henry  C.  Adams, 
this  account  is  a  complement  to  the  equipment  deprecia- 
tion account. 

The  purpose  of  a  depreciation  account,  is  to  guard  against 
the  overstatement  of  net  revenue  by  failure  to  include  all 
the  costs  of  operation  in  operating  expenses,  while  the  pur- 
pose of  the  additions  and  betterments  accounts  is  to  guard  against 
the  understatement  of  net  revenue  by  including  in  operating 
expenses  as  a  cost  of  operation  what  iu  fact  is  an  improvement 
to  the  property.  .  .  A  This  does  not  mean  that  shareholders 
are  denied  the  liberty  of  improving  their  property  out  of  current 
revenue.  That  is  a  matter  of  policy,  and  not  of  accounting. 
It  does  mean,  however,  that  in  case  shareholders  approve  the 
Ijolicy  of  improving  property  out  of  current  revenues,  the  ex- 
penditures on  account  of  such  improvements  should  be  charged 
in  the  income  account,  and  not  included  in  an  account  the  chief 
purpose  of  which  is  to  measure  cost.3 

*  Adams,  "Railroad  Bonds  as  Securities  from  National  Banks,"  5. 
5  Interstate  Commerce  Commission,  Statistics  of  Railways,   1906: 

U. 


CHAPTER  IX 

SOME   FINANCIAL   ASPECTS   OF   OPERATION 

Operation  Concerned  With  Net  Earnings. — The  opera- 
tion of  a  railroad  is  primarily  the  domain  of  the  presi- 
dent. In  directing  operation,  the  president  must  have 
constantly  in  mind  the  attitude  of  the  board  of  directors, 
which  represents  the  interest  of  the  shareholders.  Within 
recent  years  the  president  has  had  to  conform  to  the  re- 
quirements of  the  government  as  the  agency  which  exists 
to  promote  and  protect  the  welfare  of  the  people  whom  the 
railroad  must  serve.  From  the  viewpoint  of  the  board  of 
directors  the  railroad  president  as  operating  head  is  gov- 
erned by  the  equation : 

Earnings — Expenses^=Nct  Earnings 

In  each  factor  of  this  equation,  both  the  investor  and  the 
people  have  a  vital  interest.  What  these  two  factors  shall 
be  has  always  been  the  principal  cause  of  contention  be- 
tween the  railroads  and  the  public. 

Earnings  and  the  Rate  of  Transportation. — The  elements 
which  enter  into  the  first  factor — Earnings — are  (1)  rate 
of  transportation,  and  (2)  volume  of  traffic.  While  these 
elements  are  interdependent,  they  may  be  separately  con- 
sidered. The  rate  charged  for  transportation  is  not  only 
of  highest  importance  to  the  road,  but  on  it  also  depends 
the  prosperity  of  every  enterprise  which  is  to  be  served. 
It  was  the  higli  cost  of  transportation  by  wagon  road  and 
by  canal  that  brought  the  railroad  into  existence.  It  was 
prospective  lower  cost  to  producer  and  consumer  that  led 
the  people,  through  their  governments,  to  incorporate  rail- 
roads and  to  grant  franchises.     It  was,  however,  the  pros- 

149 


RAILROAD  FINANCE 

pect  of  obtaining  an  ccjuitable  share  in  the  profits  to  the 
community  that  led  the  investor  to  capitalize  the  under- 
takings and  to  assume  the  risks  of  construction,  mainte- 
nance, and  operation.  The  rate  question,  therefore,  must 
continue  to  be  a  subject  for  joint  consideration  so  long  as 
the  railroad  remains  in  private  hands.  The  administra- 
tive problems  of  rate  making  need  not  be  considered  here, 
as  they  are  fully  discussed  in  another  volume.^ 

The  public  interest  in  railroad  charges  demands  that 
transportation  rates  must  be  fair  in  themselves;  also  that 
they  must  be  fair  as  between  commodities  and  classes  of 
commodities,  as  between  shippers,  and  as  between  places. 
The  exercise  of  government  authority  over  rates  has 
tended  in  some  instances  to  raise  the  level  of  rates  and 
so  to  increase  earnings.  This  has  been  the  effect  of  put- 
ting an  end  to  the  giving  of  rebates  and  of  free  transpor- 
tation. But  now  that  congress  has  declared  that  the  bur- 
den of  proof  shall  be  upon  the  railroads  to  show  that  pro- 
posed increases  in  rates  are  just  and  reasonable,  the  effect 
must  be  to  set  a  limit  to  earnings. 

The  tendency  to  increase  expenses  and  at  the  same  time 
to  diminish  earning  power  necessarily  imposes  grave  re- 
sponsibilities upon  those  who  are  charged  with  the  man- 
agement of  railroads;  for  fixed  charges  must  be  met  and 
reasonable  profits  must  be  obtained  for  distribution  among 
the  shareholders,  else  railroad  securities  will  lose  their  at- 
tractiveness to  investors.  It  is  therefore  the  problem  of 
the  management  to  determine  how  this  situation  is  to  be 
met. 

Earnings  and  the  Volume  of  Traffic. — Volume  of  trafifie 
is  a  field  for  almost  unrestrained  initiative  on  the  part  of 
the  operating  head.  This  is  qualified  only  by  the  interest 
which  the  people  have  in  other  aspects  of  maintenance  and 
operation.     So  important  is  this  element  to  the  earnings 

1  Johnson   and   Huebner,   "Eailroad   Traffic   and    Rates." 

150 


FINANCIAL  ASPECTS  OF  OPERATION 

of  the  road  that  it  is  put  under  separate  management. 
In  many  instances  the  enterprise  of  the  traffic  manager 
has  gone  to  such  length  that  in  the  public  interest  it  must 
be  restrained ;  thus  where,  as  a  means  of  increasing  traffic, 
rate-cutting,  pooling,  or  other  forms  of  manipulation  are 
attempted,  the  result  has  been  to  disturb  or  to  restrain 
trade  and  thus  seriously  to  handicap  production.  While 
there  are  certain  wholesome  restraints  to  be  exercised  over 
the  traffic  manager  in  his  effort  to  increase  traffic,  there  is 
a  wide  range  of  activity  within  which  competition  con- 
tinues unhampered.  Traffic  is  necessarily  made  up  of  the 
products  of  persons  who  are  engaged  in  industrial  pur- 
suits. Unrestrained  competition  for  traffic  may  be  car- 
ried on  along  several  different  lines:  (1)  providing  facili- 
ties for  the  development  of  local  resources;  (2)  cooperating 
with  local  trade  bodies  and  with  those  interested  in  build- 
ing up  centers  of  population;  and  (3)  establisliing  such 
connections  and  providing  sach  facilities  as  will  promote 
through  traffic. 

The  railroads  which  serve  the  newer  parts  of  the  coun- 
try have  taken  steps  to  encourage  immigration  into  their 
territory  by  means  of  extensive  advertising  both  in  this 
country  and  in  Europe,  and  by  offering  special  rates  to 
homeseekers  and  settlers.  Land  grant  railroads  have  gen- 
erally sold  their  lands  to  settlers  at  low  prices.  Many 
railroads  have  been  active  in  the  fostering  of  agriculture 
through  the  establishment  of  experiment  stations,  the  cir- 
culation of  educational  literature,  the  giving  of  prizes,  and 
the  operation  of  agricultural  trains  and  good  roads  trains 
They  have  also  provided  locations  for  manufacturers  and 
merchants,  and  collected  and  circulated  information  which 
tends  to  the  utilization  of  undeveloped  resources.  This 
work  is  conducted  by  the  traffic  department  in  some  cases; 
in  others,  by  special  departments  established  for  the  pur- 
pose.    Town  promotion  has  been  another  variety  of  opera- 

151 


RAILROAD  FINANCE 

tive  enterprise  whieli  has  been  undertaken.  A  railroad 
may  act  directly,  devoting  to  the  development  of  a  town  a 
part  of  its  own  capital,  or  it  may  cooperate  with  local 
representatives  to  foster  settlement  and  trade  activity. 
The  former  method  has  not  always  resulted  favorably. 
Thus  Tacoma  in  its  initial  period  was  selected  by  the 
Northern  Pacific  as  the  site  for  its  terminus  on  Puget 
Sound,  and  to  its  development  the  railroad  directly  con- 
tributed. Seattle,  a  rival  trading  town,  was  denied  rail- 
road connection,  in  order  that  Tacoma  might  be  put  in  a 
position  of  relative  advantage.  By  means  of  local  co- 
operation, however,  Seattle  continued  to  grow,  and  eventu- 
ally the  coming  of  the  Great  Northern  enabled  it  to  com- 
pete upon  equal  terms.  With  the  financial  breakdown  of 
the  Northern  Pacific,  Tacoma  necessarily  suffered;  while 
Seattle,  with  a  solvent  railroad  interested  in  its  welfare 
and  with  an  energetic  citizen  body,  assumed  the  position 
of  leadership  among  the  cities  of  the  Pacific  Northwest. 
When,  eventually,  the  Northern  Pacific  finally  decided  to 
seek  an  entrance  into  Seattle,  it  found  itself  in  the  posi- 
tion of  competing  with  other  lines  for  terminal  sites  which 
had  once  been  available  at  little  cost. 

One  of  the  most  serious  problems  of  management,  so 
far  as  earnings  are  concerned,  is  the  acquisition  of  terminal 
facilities  and  the  establishment  of  connections  with  other 
lines  so  as  to  increase  through  traffic.  The  financial  risk 
involved  in  the  entrance  into  a  great  city  is  well  shown  by 
the  unfortunate  experience  of  the  Baltimore  and  Ohio  in 
Philadelphia  and  of  the  Wabash  in  Pittsburgh.  The 
Pennsylvania  extension  into  New  York  was  undertaken  for 
the  double  purpose  of  opening  a  passenger  terminal  in  the 
heart  of  that  city  and  of  establishing  a  closer  connection 
with  the  New  York,  New  Haven,  and  Hartford,  so  as  to 
make  it  possible  to  run  through  freight  and  passenger 
trains  between  New  England   and  points  served  by  the 

152 


FINANCIAL  ASPECTS  OF  OPERATION 

Pennsylvania ;  also  through  the  Long  Island  railroad  to 
obtain  a  favorable  deep  sea  connection  for  European 
freight.  Where  there  is  already  a  physical  connection 
between  two  railroads,  it  is  possible  to  facilitate  the  de- 
velopment of  through  traffic  by  mutual  agreement.  Thus 
the  New  York  Central's  arrangement  with  the  New  York, 
New  Haven,  and  Hartford  for  the  handling  of  traffic  over 
the  Boston  and  Albany  promises  to  benefit  all  parties  con- 
cerned because  of  the  more  efficient  use  of  existing  facili- 
ties which  it  makes  possible. 

Expenses  and  Efficiency  of  Management. — The  second 
factor  in  successful  management  is  expenses.  The  test  of 
ability  to  meet  fixed  charges  and  pay  dividends  is  in  the 
net  difference  between  gross  earnings  and  expenses,  or  net 
earnings.  Turning  to  a  consideration  of  expenses,  we  are 
confronted  with  the  problem  of  economy  and  efficiency  of 
management  so  far  as  responsibility  may  be  fixed  for  con- 
tracting and  purchasing,  and  for  conducting  physical  op- 
erations. Economy  does  not  mean  reduction  in  expendi- 
tures, but  obtaining  the  greatest  possible  return  at  the  least 
outlay.  Operating  efficiency  has  no  relation  to  rates  of 
transportation.  Whatever  may  be  the  rate  charged  for 
service,  the  operating  head  is  responsible  for  performing 
that  service  in  an  economical  and  efficient  manner,  and 
with  due  regard  to  the  interest  of  both  the  investor  and 
the  public. 

Interest  of  the  Public  as  Represented  hy  Government. — 
As  has  been  said,  a  railroad  exists  for  the  service  of  the 
public,  and  it  is  brought  into  existence  because  of  the  bene- 
fits which  may  accrue  to  the  public.  The  state  bestows 
upon  the  railroad  the  right  to  exist  and  to  carry  on  busi- 
ness, and  the  granting  of  this  privilege  implies  the  reten- 
tion of  an  equivalent  right  to  dictate  as  to  the  manner  in 
'Aiiicli  that  privilege  shall  be  exercised  so  long  as  vested 
interests   are   not  impaired.     The   interest  of  the   public 

153 


RAILROAD  FINANCE 

may  be  more  or  less  safeguarded  in  the  charter  or  articles 
of  incorporation,  or  in  a  general  act  governing  incorpora- 
tion of  railroads.  It  may  be  further  protected  by  supple- 
mental statutes,  and  through  orders  of  a  board  or  commis- 
sion established  by  the  state  and  endowed  with  authority 
over  the  affairs  of  railroad  corporations. 

Uninterrupted  Service. — The  public  is  interested  in  hav- 
ing continuous  operation  of  railroad  facilities.  To  this 
end  the  state  through  the  courts  will  take  over  a  railroad 
when  for  reasons  financial  or  otherwise  an  interruption  of 
the  transportation  service  is  threatened.  Similarly,  it 
may  take  steps  to  bring  labor  disputes  to  a  settlement,  as 
the  federal  government  has  done  through  the  Erdman  act. 

Adequacy  of  Service. — Public  sei^ice  must  be  adequate 
service.  The  public  interest  demands  that  equipment 
shall  be  available  for  all  kinds  of  traffic;  and  that  the  car- 
rier and  not  the  shipper  shall  be  expected  to  know  the  ex- 
act kind  of  equipment  required  in  any  particular  case. 
It  requires,  also,  that  equipment  be  available  when  needed, 
and  that  it  shall  be  furnished  without  discrimination  as 
between  shippers  or  places.  The  state  authority  has  even 
been  invoked  to  prescribe  a  charge  for  "reciprocal  demur- 
rage" as  a  penalty  upon  carriers  for  failure  to  provide  a 
certain  number  of  cars  within  a  stated  time,  to  move  the 
ears  a  certain  number  of  miles  per  day,  and  to  deliver 
wathin  a  certain  time — a  measure  of  doubtful  wisdom  and 
expediency.  Stations  and  yards  must  be  provided  to 
meet  the  demands  of  traffic.  There  must  be  ample  facili- 
ties for  the  proper  handling  and  storage  of  freight,  and 
for  delivery  to  connecting  lines  or  to  consignees.  Passen- 
ger stations  must  be  located  at  convenient  points  along  the 
line,  and  train  schedules  must  be  arranged  with  due  re- 
gard to  the  conflicting  interest  of  through  and  local  pas- 
sengers. 

Provisions  for   Health,   Comfort,  and   Convenience. — A 

154 


FINANCIAL  ASPECTS  OF  OPERATION 

railroad  must  make  provision  for  the  health,  comfort,  and 
convenience  of  passengers,  and  for  the  humane  handling 
of  live  freight.  Stations  and  cars  must  be  furnished  with 
proper  heat,  light,  and  water,  and  with  ventilating  and 
sanitary  facilities.  Rules  must  be  made  and  enforced  for 
tlie  protection  of  passenger  against  passenger,  as  in  the 
prevention  of  the  spread  of  communicable  diseases.  Ani- 
mals must  be  handled  without  cruelty,  and  proper  provi- 
sion must  be  made  for  supplying  them  with  food  and 
water,  and  with  shelter  when  needed. 

Safety. — Railroad  operation  must  be  conducted  with 
ample  provisions  for  the  safety  of  passengers  who  may 
cross  the  right  of  way.  There  is  a  widespread  movement 
toward  the  elimination  of  grade  crossings,  particularly  in 
or  near  large  centers  of  population,  and  for  the  guarding 
of  those  which  remain.  As  a  means  of  preventing  ani- 
mals and  unauthorized  persons  from  passing  along  the 
roadway,  fences,  cattle  guards,  and  warning  signs  are 
necessary.  As  a  means  of  protecting  trains,  interlocking 
signals  and  block  signals  have  been  installed  upon  lines 
where  train  service  is  most  frequent,  and  these  systems  are 
being  constantly  extended.  The  equipping  of  cars  with 
automatic  couplers,  power  brakes,  and  with  grab  irons  and 
other  safety  devices  has  been  made  compulsory  by  acts  of 
congress,  and  the  courts  have  made  this  legislation  effec- 
tive. Regulations  have  also  been  prescribed  for  the 
handling  of  explosives,  and  for  the  inspection  of  locomo- 
tive boilers.  Because  of  the  danger  from  smoke  in 
tunnels,  it  has  been  found  necessary  to  substitute  elec- 
tric power  for  steam  locomotives  in  certain  cases.  In 
New  York  City  this  was  required  by  statute;  in  the 
Iloosac  tunnel  in  Massachusetts  the  railroad  management 
itself  took  the  initiative.  It  is  a  matter  of  public  concern 
that  the  railroad  employees  responsible  for  the  movement 
of  trains  be  capable  of  working  at  a  high  state  of  physi- 

155 


RAILROAD  FINANCE 

cal  and  mental  efficiency.  To  that  end  the  hours  of  en- 
ginemen,  train  despatchers,  and  telegraph  operators  have 
engaged  the  attention  of  the  legislative  authority.  Finally 
there  is  a  growing  tendency  toward  the  enactment  of 
statutes  to  govern  the  liability  of  railroads  on  account  of 
accidents  to  their  employees. 

Not  only  is  the  public  concerned  with  matters  like  those 
above  mentioned,  which  admittedly  lie  within  tlie  scope 
of  state  regulation,  but  it  is  also  interested  in  obtaining 
concessions  from  the  railroads.  All  communities  are  de- 
sirous of  having  beautiful  stations  located  in  easily 
accessible  places,  while  from  the  point  of  view  of  the  rail- 
road less  elaborate  buildings  in  cheaper  locations  might  be 
adequate.  Shippers  and  passengers  wish  fast  service, 
though  speed  is  progressively  expensive  and  dangerous  to 
life  and  property.  Passengers,  too,  are  constantly  striv- 
ing for  more  frequent  train  service. 

The  Manager  as  Employer  and  Contractor. — All  of  the 
foregoing  have  to  do  with  the  public  which  is  to  be  served. 
In  addition  there  are  two  other  constituencies  with  which 
the  manager  must  deal — those  who  sell  labor,  and  those 
who  sell  materials  and  services  other  than  personal. 
Railroad  employees,  who  already  receive  over  forty  per 
cent,  of  gross  receipts,  are  strongly  organized;  and 
through  their  "brotherhoods"  they  are  able  to  present 
formidable  claims  for  additional  wages,  for  shorter  hours 
of  labor,  and  for  more  adequate  provision  for  safety. 
Manufacturers  and  dealers  in  materials  and  supplies  strive 
to  maintain  prices  and  to  increase  them,  not  only  as  a 
means  of  adding  to  their  own  profits  but  also  as  a 
means  of  compensating  them  for  advances  in  the  cost  of 
labor  and  other  factors  in  production. 

Tendency  to  Increase  Expenses. — The  foregoing  suggests 
the  character  of  the  problem  of  railroad  management  so 
far  as  tends  to  limit  discretion  and  fix  the  conditions  which 

156 


FINANCIAL  ASPECTS  OF  OPERATION 

must  be  met  through  expenditures.  From  what  has  been 
said,  it  is  apparent  that  there  is  a  strong  tendency  to  in- 
crease expenses,  and  that  this  tendency  promises  to  become 
stronger  rather  than  to  diminish.  Government  regula- 
tions of  railroads  is  no  longer  a  debatable  proposition  but 
an  established  principle,  and  this  applies  to  matters 
affecting  physical  operation  as  well  as  to  traffic  and  rates ; 
labor  organizations  have  come  to  stay ;  the  consolidation 
of  industrial  and  trading  concerns  is  a  condition  that  must 
be  met. 

Opportunity  for  Economical  Management. — While  the 
management  must  recognize  all  these  conditions  as  fixed 
and  beyond  its  control,  there  are  other  aspects  of  the  ex- 
pense problem  for  which  it  has  responsibility.  It  is  re- 
sponsible for  the  organization  provided  and  the  methods 
and  procedure  employed  in  contracting  and  purchasing; 
it  is  responsible  for  efficiency  in  the  direction  of  physical 
operation  and  maintenance.  Contracting  and  purchasing 
has  to  do  with  providing  the  men,  the  materials  and  sup- 
plies, and  the  equipment  needed.  Reduced  to  a  formula, 
cost  of  operation  and  maintenance  is  made  up  of  the  fol- 
lowing factors: 

Direct  Labor  Cost  -{-  Direct  Material  Cost  +  Indirect  Cost 
:=  Expenses 

Each  of  these  factors  may  be  resolved  into  elements  for 
managerial  consideration.  Direct  labor  cost  depends 
upon:  (1)  rate  per  time  unit;  (2)  number  of  time  units 
employed;  and  (3)  efficiency  of  labor.  Direct  material 
cost  depends  upon:  (1)  price  of  material;  (2)  quantity  of 
material  used;  and  (3)  quality  of  material.  Indirect  cost 
is  made  up  of  a  number  of  elements,  all  of  which  should  be 
the  subject  of  administrative  judgment.  Such  are:  (1) 
cost  of  administration  and  supervision;  (2)  pro-rata  of 
maintenance  charges,  including  repairs,  replacements,  and 

157 


RAILROAD  FINANCE 

obsolescence;  (3)  pro-rata  of  rentals  of  properties  used  and 
not  owned,  and  interest  on  capital  outlay  for  roadway, 
structures,  and  equipment;  and  (4)  pro-rata  of  other 
items  of  overhead  expense. 

Labor  Cost  and  Labor  Efficiency. — As  the  greatest  single 
item  of  railroad  expense  represents  labor  cost,  attention 
will  be  naturally  directed  to  the  question  of  labor 
efficiency,  since  reductions  in  wages  are  clearly  imprac- 
ticable. With  the  increasing  complexity  of  systems  of 
railroad  organization,  the  division  officers  have  lost  more 
or  less  of  their  former  authority.  The  amount  of  their  ex- 
penditures is  determined  in  advance  by  higher  officers, 
and  they  are  judged  as  to  efficiency  by  the  relation  which 
their  earnings  bear  to  those  expenditures.  As  a  result  the 
men  in  charge  are  generally  reluctant  to  make  reduction 
in  forces  and  expenditures  when  this  could  be  done  to  the 
advantage  of  the  railroad,  because  of  the  difficulty  of 
obtaining  authority  for  increases  when  the  needs  of  the 
business  require  them.  A  corporation  budget  should  be 
exactly  apportioned  upon  the  basis  of  careful  estimates; 
but  it  should  be  capable  of  modification,  also,  to  meet 
actual  conditions  for  which  the  estimates  have  not  made 
adequate  provision.. 

Efforts  to  Promote  Labor  Efficiency. — Railroad  service 
requires  skilled  workmen;  and  all  railroads  offer  induce- 
ments to  efficiency.  Prizes  are  given  to  apprentices  for 
satisfactory  evidence  of  progress,  and  instruction  for  em- 
ployees is  furnished  directly  by  agents  of  the  railroads 
and  indirectly  through  associations  subsidized  by  railroads. 
Systems  of  promotion  are  maintained,  and  even  the  sec- 
tion gangs  are  encouraged  to  endeavor  to  obtain  prizes 
offered  for  the  best  kept  sections  of  roadway.  In  order  to 
protect  the  railroad  from  losses  through  claims  for  freight 
lost  or  damaged,  employees  are  urged  to  exercise  all  pos- 
sible care  in  the  handling  of  traffic ;  in  order  to  keep  the 
g(jod  will  of  the  public,  employees  are  urged  to  be  courte- 

158 


FINANCIAL  ASPECTS  OF  OPERATION 

oiis  in  their  attitude  toward  passengers  and  shippers.  If 
it  be  desirable  that  railroad  employees  be  trained  to  a  high 
degree  of  efficiency,  it  is  also  desirable  that  they  should  be 
encouraged  to  stay  in  the  service  after  they  have  been 
trained.  To  this  end  railroads  have  established  relief  sys- 
tems, insurance  systems,  and  pension  systems  for  the  bene- 
fit of  employees,  and  joint  committees  of  safety  composed 
of  employees  and  railroad  officials. 

Economical  Purchase  of  Materials  and  Supplies. — An- 
other large  element  of  railroad  operating  cost  is  materials 
and  supplies.  It  is  the  duty  of  the  purchasing  agent  to 
keep  constantly  informed  of  market  conditions  and  of  the 
needs  of  the  railroad  which  he  serves.  This  he  does 
through  study  of  current  periodicals,  conferences  with 
dealers,  and  examination  of  the  requisitions  which  show 
the  kind  and  quantity  of  materials  or  supplies  needed,  the 
purpose  for  which  they  are  to  be  used,  and  the  time  when 
they  must  be  available.  He  must  also  see  that  they 
are  delivered  where  they  are  to  be  used  or  stored  until 
needed,  and  he  must  attend  to  the  sale  of  old  materials. 
Some  of  his  purchases  are  made  under  contract ;  others 
through  open  market  orders  placed  after  competitive  bids 
upon  detailed  specifications.  The  purchasing  agent  is 
finally  responsible  for  the  inspection  of  materials  and  sup- 
plies in  order  to  insure  the  railroad  against  loss  through 
shortage  or  inferior  quality.  In  this  he  is  assisted  by  the 
other  officers  and  employees,  for  it  is  generally  required 
that  users  of  material  must  report  all  eases  in  which  there 
has  been  failure  to  conform  to  specifications.  For  their 
information  and  for  the  guidance  of  tlie  purchasing  agent, 
it  is  the  practice  of  many  of  the  operating  departments  to 
prepare  printed  specifications  defining  the  grade  of  ma- 
terials and  supplies,  and  the  tests  Miiieh  must  be  met. 
Various  independent  companies  operate  laboratories  for 
the  inspection,  testing,  and  analysis  of  railroad  supplies 
and  materials,  and  .some  of  the  larger  railroads  have  found 

159 


RAILROAD  FINANCE 

it  economical  to  maintain  laboratories  of  their  own.  The 
general  storekeeper  is  usually  subordinate  to  the  purchas- 
ing agent.  He  is  charged  with  the  care  and  distribution 
of  materials  and  supplies.  He  must  endeavor  to  main- 
tain his  stock  to  meet  all  current  demands,  but  he  must 
also  endeavor  to  have  no  more  capital  than  necCvSsary  tied 
up  in  his  stores. 

Economical  Use  of  Materials  and  Supplies. — In  the  use 
of  materials  and  supplies  there  are  opportunities  for  the 
exercise  of  economy.  It  has  been  found  upon  experiment 
that  of  the  coal  used  in  locomotive-s,  only  forty-five  per 
cent,  is  utilized  in  effective  work.  As  the  railroads  of  the 
United  States  have  an  annual  fuel  expense  of  about  $200,- 
000,000,  this  represents  a  great  waste.  Much  of  this  waste 
is  not  avoidable,  however,  because  of  necessary  limitations 
of  physical  dimensions,  and  of  conditions  of  operation. 
But  while  a  locomotive  cannot  approach  the  standards  of 
fuel  economy  possible  in  a  stationary  boiler,  careless  and 
inefficient  firing  may  be  eliminated  through  instructions  to 
firemen,  and  through  the  establishment  of  cooperative  re- 
lations between  firemen  and  enginemen,  so  that  firing  shall 
be  done  at  the  proper  time  and  so  make  it  possible  to  re- 
duce the  waste  of  fuel  -  while  the  locomotive  is  standing 
idle  either  before  or  after  a  run. 

Economical  Use  of  Railroad  Property  and  Equipment. — 
In  the  interest  of  economy  it  is  imperative  that  the  most 
effective  use  be  made  of  railroad  property,  as  that  prop- 
erty is  subject  to  overhead  charges  for  interest,  rentals, 
and  depreciation.  So  far  as  proper  service  of  the  public 
will  permit,  cars  must  be  loaded  to  the  maximum  capa- 
city, train  loads  must  also  be  increased,  cars  and  locomo- 
tives of  greater  efficiency  must  be  introduced,  dead 
weight  and  light  ear  and  locomotive  mileage  must  be  re- 

2  See  series  of  articles  on  "Opportunities  for  Economy  on  Rail- 
ways," by  L.  C.  Fritch  in  Railwatj  Age  Gazette,  1911-2:  LI,  1059 
et  seq. 

160 


FINANCIAL  ASPECTS  OF  OPERATION 

duced,  and  those  speeds  must  be  adopted  which  are  most 
economical  for  the  different  varieties  of  traffic.  The  New 
York  Central  has  increased  by  forty  per  cent,  the  efficiency 
of  its  Pennsylvania  division  through  the  substitution  of 
twenty-six  ]\Iallet  locomotives  for  sixty  consolidated  loco- 
motives. It  is  now  able  to  haul  1400  cars  instead  of  1000 
cars  per  day  over  this  single  track  line,  and  to  effect  a 
saving  in  fuel  per  unit  of  work.  It  has  also  found  it  pos- 
sible to  dispense  with  ten  trains  each  way  per  day,  and  to 
I'oduce  by  eighty  per  cent,  the  amount  of  overtime. 
Instead  of  operating  trains  of  3500  tons  at  the  rate  of 
fifteen  to  eighteen  miles  per  hour,  it  now  hauls  trains 
of  4000  tons  at  the  rate  of  ten  to  fourteen  miles  per 
hour, 

"Scientific  Management"  as  a  Factor  in  Economical 
Operation. — About  twenty  per  cent,  of  railroad  operating 
expenses  represents  the  cost  of  maintenance  of  equipment. 
During  the  time  that  a  ear  or  a  locomotive  is  being  over- 
hauled in  the  shops,  it  can  earn  nothing  upon  the  invest- 
ment represented  by  its  cost.  It  is  desirable,  therefore,  to 
reduce  this  period  as  much  as  possible.  This  has  been 
done  by  the  Atchison  through  the  introduction  of  im- 
proved methods  of  shop  management  based  largely  upon 
the  system  employed  by  engineers  of  the  "scientific  man- 
agement" group.  The  economies  which  were  effected  by 
this  railroad,  partly  as  the  result  of  the  adoption  of  this 
system,  and  partly  from  other  causes,  have  led  to  the  sug- 
gestion that  it  be  introduced  generally  upon  all  railroads. 
This,  it  is  claimed,  would  make  possible  a  great  reduction 
in  the  cost  of  operation.^ 

The  guiding  principles  of  the  "scientific  management" 
group  of  engineers  as  set  forth  by  Mr,  Frederick  W.  Tay- 
lor, are  as  follows: 

"» Interstate  Commerce  Commission,  Evidence  Taken  in  the  Matter 
of  Proposed  Advances  in  Freight  Rates  by  Carriers,  VIII,  4766- 
803,      (1911.) 

12  161 


RAILROAD  FINANCP: 

Fir6t:  A  Large  Daily  Task. — Each  man  in  the  establishment, 
high  or  low,  shoiilcl  daily  have  a  clearly  definea  task  laid  out 
before  him.  This  task  should  not  iu  the  least  degree  be  vague  or 
iudefiuite,  but  should  be  circumscribed  carefully  aud  completely, 
and  should  not  be  easy  to  accomplish. 

Second:  Standard  Conditions. — Each  man's  task  should  call 
for  a  full  day's  work,  and,  at  the  same  time,  the  workman  should 
be  given  such  conditions  and  such  appliances  as  will  enable  him 
to  accomplish  his  task  with  certainty. 

Third:  High  Pay  For  Success. — He  should  be  sure  of  large 
pay  when  he  accomplishes  his  task. 

Fourth:  Lose  in  Case  of  Failure. — When  lie  fails  he  should 
be  sure  that  sooner  or  later  he  will  be  the  loser  liy  it. 

When  an  establishment  has  reached  an  advanced  state  of  or- 
ganization, in  many  cases  a  fiftli  element  should  be  added,  namely, 
the  task  should  be  made  so  difficult  that  it  can  only  be  accom- 
plished by  a  first-class  man.* 

In  the  application  of  these  principles,  each  piece  of  work 
is  carefully  planned  before  it  is  undertaken.  This  in- 
volves a  careful  study  to  determine  the  simplest  and 
cheapest  possible  method  of  performing  the  task.  The 
next  step  is  the  preparation  of  a  card  of  instructions 
for  the  foreman  or  the  v/orkman,  prescribing  in  minute 
detail  the  manner  in  which  the  work  is  to  be  done.  Once 
assigned  to  the  work,  the  workman  is  supplied  with  the 
tools  and  materials  needed  for  its  performance.  If  he 
accomplishes  his  task  according  to  schedule  and  in  a  satis- 
factory manner,  he  becomes  entitled  to  a  bonus.  If  he 
fails  he  is  given  personal  instruction;  and  if  he  then  fails 
he  is  assigned  to  other  work  for  which  he  may  be  better 
qualified.  Thus  the  workman  is  enabled  to  work  under 
the  most  favorable  conditions,  and  so  accomplish  more  and 
earn  more  with  less  effort  and  in  less  time.  Scientific 
management  separates  planning  from  performance;  it  re- 

4  Taylor,  "Shop  Manasjement."  Amer.  Roc.  of  Mech.  Engrs., 
Transactions,  XXTV,  13G8.  (1903.)  See  also  his  "Principles  of 
Scientific  Mo  n  a  gem  en  t."      (1011.) 

162 


FINANCIAL  ASPECTS  OF  OPERATION 

lieves  labor  of  all  responsibilities  of  management;  it  pro. 
vides  for  performance  according  to  schedule;  it  requires 
current  records  of  performance ;  and  it  requires  standard- 
ized methods  and  equipment.  Not  only  is  the  efficiency 
of  labor  increased,  but  the  efficiency  of  material  and  of 
plant  and  equipment  as  well.  The  employer  is  thus  en- 
abled to  make  more  effective  use  of  plant  and  equipment, 
and  to  save  in  fixed  charges  upon  his  property.  He  gains 
through  reduced  labor  cost  resulting  from  the  increase  in 
the  productive  power  of  the  workmen.  This  in  brief  out- 
line is  the  claim  of  the  advocates  of  scientific  management. 
The  difficulties  in  the  way  of  the  general  adoption  of 
such  a  system  by  the  railroads  have  been  ably  set  forth 
and  discussed  by  Mr.  William  James  Cunningham,  from 
whose  article  the  following  paragraphs  are  presented: 

Obstacles  in  the  Way. — The  success  of  scientific  management 
in  conimerciiil  unclertalcings  does  not  in  itself  prove  that  the 
new  system  would  be  equally  effective  in  railroad  work.  The 
essential  difEerences  between  railroads  and  manufacturing  es- 
tablishments must  be  borne  in  mind.  These  differences  may  be 
summarized  under  four  headings:  (1)  area  and  extent  of  activ- 
ity: (2)  nature  of  product  or  output;  (8)  relations  with  the 
public  and  the  Government;   (4)    relations  witli  labor  unions. 

(1)  The  differences  in  area  and  extent  of  activity  are  obvious: 
the  manufacturing  establishment  with  its  concentrated  forces 
and  intensive  activity;  the  railroad  with  its  long  lines  of  com- 
munication, scattered  units  of  organization,  and  extensive  range 
of  action.  Railroad  forces,  spread  out  thinly  over  the  line, 
necessarily  work  under  scant  supervision.     .     .     . 

(2)  With  respect  to  the  nature  of  product  or  output,  there 
are  also  distinct  differences  l)etween  an  industrial  establish- 
ment, with  a  uniform  output,  and  a  railroad  repair  shop,  where 
there  is  little  uniformity  in  the  work.  The  cost  of  the  work 
in  a  railroad  shop  is  a  small  part  of  total  operating  expenses. 
Shop  and  repair  work  is  ivcMcntal  to  the  main  function  of  pro- 
ducing transportation.  The  value  or  efficiency  of  railroad  shop 
work  depends  upon  how  well  it  assists  in  the  safe  and  expedi- 
tious   movement    of    passengers    and    frciglit.     It    cannot    l)e    sys- 

1G3 


RAILROAD  FINANCE 

tematized  to  the  same  degree  as  in  manufacturing  shops,  where 
the  character  of  the  work  varies  but  slightly.  Oftentimes,  too. 
it  is  much  more  important  that  railroad  repair  work  be  done 
quickly  than  at  the  lowest  possible  cost.     .     .     . 

(3)  Quite  apparent,  also,  are  the  dissimilarities  between  rail- 
roads and  private  concerns  in  their  relations  to  the  public  and 
governmental  regulating  bodies.  A  railroad  is  a  public  service 
corporation.  The  public  rightfully  demands  that  adequacy  of 
service  shall  outrank  the  payment  of  dividends.  A  manufac- 
turing establishment  exists  solely  for  profits.  If  it  ceases  to 
be  profitable,  it  may  close  its  doors  or  change  the  nature  of  its 
business.  I'he  operation  of  an  unprofitable  road  must  continue. 
It  has  two  functions,  public  service  and  profit  making ;  it  may 
not  neglect  service  to  favor  profits.  Necessarily,  therefore, 
methods  are  employed  in  the  interest  of  public  service  even 
though  they  involve  economic  loss,  and  would  not  be  resorted 
to  if  railroads  were  operated   as  private  industries.     .     .     . 

(4)  Perhaps  the  greatest  barrier  to  the  introduction  of  any 
system  designed  to  accom])lish  savings  which  will  diminish  the 
number  of  employt's  is  the  labor  organization.  I'raclically  every 
branch  of  the  railroad  service  is  strongly  organized  and  militant. 
The  manufacturer  has  his  labor  problem  also ;  but  he  can  close 
down  his  plant  or  lock  out  his  men  if  he  sees  fit.  With  railroads, 
resistance  to  demands  considered  by  them  as  unreasonable  must 
not  be  allowed  unduly  to  affect  service.      .     •     • 

Any  system  or  contrivance  which  has  for  its  object  the  crea- 
tion of  competition  among  workmen,  or  which  will  cause  them 
to  exert  themselves,  is  repugnant  in  principle  to  labor  leaders. 
Its  direct  result,  as  they  see  it,  is  to  "speed  uj),''  and  to  lessen 
the  number  of  workmen.  Their  attitude  is  indicated  by  the 
strong  opposition  of  the  Brotherhood  of  Locomotive  Engineers 
to  the  introduction  of  the  Mallet  compound  locomotive.  .  .  . 
The  organization  held  out  strongly  for  double  pay.  on  the  theory 
that  the  Mallet  engine  does  twice  the  work  of  an  ordinary  engine, 
and,  if  ordinary  engines  were  used  instead,  double  the  number 
of  enginemen  would  l)e  necessary.  ...  Of  similar  signifi- 
cance are  the  organized  efforts  of  conductors  and  trainmen  to  pro- 
hibit double-heading.  By  this  is  meant  the  practice  of  running  two 
engines  on  a  freight  train  so  as  to  increase  its  length.  The 
resulting  decrease  in  the  number  of  trains  and  the  consequent 
smaller  number  of  train  crews  are  opposed  by  the  men. 

These  difiiculties.  serious  as  they  are,  may  be  met  by  experts. 

164 


FINANCIAL  ASPECTS  OF  OPERATION 

But  the  railroad  man  sees  no  definite  plan  for  the  application 
of  the  new  "principles" ;  and  he  has  a  fondness  for  the  con- 
crete. After  studying  scientific  management  as  applied  to  shops 
he  realizes  that  when  similar  efforts  are  made  to  extend  it  to 
the  whole  line  of  railroad  operation,  long  and  expert  study  will 
be  needed  and  new  and  unsuspected  modifications  of  the  system 
must  be  made  to  meet  the  exacting  conditions   of   railroading.s 

Managerial  Responsibility  of  the  Directorate. — The  bur- 
den of  economical  management  rests  finally  npon  the  board 
of  directors  quite  as  much  as  upon  the  railroad  officers, 
for  the  directors  must  decide  all  important  questions  of 
managerial  policy.  They  must  determine,  for  example, 
whether  manufacturing  as  well  as  repair  work  shall  be 
carried  on  in  the  railroad  shops,  and  whether  repairs 
and  improvements  upon  the  roadway  and  structures  can 
be  made  most  economically  by  the  regular  employees  or 
by  outsiders.  In  general  railroads  have  found  that  it  is 
cheaper  to  purchase  new  equipment  rather  than  to  build 
it,  but  betterment  w^ork  is  often  performed  by  concrac- 
tors,  and  minor  repairs  to  stations  out  on  the  line  may  be 
made  ])y  arrangement  witli  local  labor. 

5  Cunningham,  "Scientific  Management  of  Railroads,"  Quar.  Jour, 
of  Econ.,  XXV,  549-55. 


CHAPTER  X 

MANAGEMENT  AND  DISTRIBUTION  OF  THE  SURPLUS 

Control  Vested  in  the  Directors. — Net  earnings  lie  pri- 
marily within  the  domain  of  the  operating  head  of  a  rail- 
road. Net  income  and  other  accruals  and  charges  and 
reservations  affecting  the  surplus  account  are  primaiily 
within  the  domain  of  the  board  of  directors.  In  approach- 
ing the  subject  of  management  and  distribution  of  sur- 
plus, it  seems  desirable  to  advert  to  those  classes  of  con- 
siderations of  the  board  of  directors  which  are  internu^di- 
ate  between  net  earnings  and  surplus.  As  has  been  stated, 
tiie  result  called  net  earnings  is  the  amount  of  the  operat- 
ing return  or  earnings  of  a  railroad  remaining  after  de- 
ducting expenses — the  net  financial  return  to  the  corpo- 
ration as  a  common  carrier.  Surplus,  on  the  other  hand, 
is  the  net  amount  which  remains  on  the  balance  sheet  after 
deducting  from  the  total  of  assets  an  amount  which  repre- 
sents the  invested  capital  plus  the  current  liabilities  and 
cash  reserves.     Stated  in  the  form  of  an  equation : 

Assets — (Invested  Capital  -f-  Current  Liabilities  and  Cash 
Rescrves)^^8urplus 

Between  the  net  earnings  of  any  current  fiscal  period 
and  the  surplus  of  assets  over  liabilities  and  cash  reserves 
lie  all  of  those  contractual  relations  and  official  actions 
which  affect  the  properties  and  the  obligation.s  of  the  com- 
pany which  are  not  directly  connected  with  its  operations 
as  a  common  carrier. 

Scope  of  AuthorUy. — Among  the  contractual  relations 

166 


DISTRIBUTION  OF  THE  SURPLUS 

which  lie  within  the  realm  of  board  discretion  and  affect 
the  net  income  are  those  which  have  to  do  with  ( 1 )  securi- 
ties held;  (2)  properties  and  enterprises  owned  and 
operated  but  not  as  integral  parts  of  the  transportation 
facilities;  (3)  bonds  outstanding  for  borrowed  capital; 
(4)  guarantees  of  securities  issued  by  subsidiary  com- 
panies; and  (5)  leases  of  roads  and  properties  used  by 
the  corporation.  In  recognition  of  the  non-operative 
character  of  these  contracts,  properties,  investments,  and 
obligations,  and  of  the  differences  in  official  responsibility 
wliich  attach  to  them,  they  are  usually  kept  separate. 
Neither  the  accruals  to  the  corporation  nor  the  charges  of 
these  classes  are  carried  to  the  operating  account;  instead, 
they  are  separately  recorded  and  summarized  in  the  in- 
come account,  to  which  is  also  carried  the  net  earnings. 
Stated  in  the  form  of  an  equation : 

Net  Earnings  -\-  {Income  Accruals — Charges  Against  In- 
come) =  Net  Income 

This  account  therefore  develops  the  net  income  or  net 
investment  return  of  the  corporation,  i.e.,  the  return  on 
its  total  investment. 

But  having  developed  the  net  income,  there  are  still 
other  increases  and  decreases  in  resources  that  are  to  be 
considered  before  the  management  may  know  what  is  the 
surplus  to  be  disposed  of — the  net  increase  or  net  de- 
crease in  the  assets.  In  other  words,  we  have  still  to  deal 
with  the  profit  and  loss  account,  to  which  is  credited  the 
net  income,  also  the  extraordinary  increases  less  the  ex- 
traordinary decreases  in  assets.  Stated  in  the  form  of  an 
equation : 

Net  Income  ~\-  (Profits — Losses)  =  Net  Profits 

To  the  net  income  must  be  added  the  increases  and  de- 
creases whicli  are  not  the  direct  result  either  of  executive 

167 


RAILROAD  FINANCE 

discretion  or  of  the  continued  investment  use  of  the  es- 
tate, viz:  the  increases  (or  profits)  due  to  the  sales  of 
securities  and  properties,  the  amortization  of  discount, 
etc.;  the  decreases  (or  losses)  due  to  extraordinary  ac- 
cident, theft,  fire,  flood,  etc.  The  current  net  profit  or  net 
loss  when  added  to  the  balance  remaining  from  prior  fiscal 
periods  becomes  a  fund  which  is  subject  to  the  direction  of 
the  board  of  directors,  and  as  such  is  distributable  to 
shareholders,  if  the  board  may  so  determine. 

Uses  Made  of  the  Surphis. — Assuming  that  all  the  assets 
and  liabilities  are  fairly  stated  in  the  accounts  and  th.at  no 
action  is  taken  by  the  board  affecting  net  profits  other  than 
that  of  distribution  to  shareholders  in  the  form  of  divi- 
dends and  that  dividends  declared  are  paid,  assuming  fur- 
ther that  there  is  no  subscribed  surplu;..  then  net  profits 
(or  undistributed  profits)  as  shown  on  the  balance  sheet 
would  be  a  term  synonymous  with  surplus.  Such  a  condi- 
tion, however,  seldom  obtains.  In  the  first  place,  for  rea- 
sons which  may  be  sufficient  to  the  management,  the  ac- 
counts may  be  so  kept  as  to  conceal  instead  of  reveal  the 
true  condition  of  the  corporate  estate.  Again,  there  may  be 
a  surplus  which  has  not  been  accumulated  through  opera- 
tion or  from  the  investment  accruals  to  the  corporate  estate, 
but  through  subscriptions;  or,  it  may  be  thought  to  be  the 
part  of  wisdom  to  appropriate  amounts  from  undistributed 
profits  for  a  definite  corporate  use,  i.  e.,  amounts  may 
be  set  aside  or  be  retained  in  the  business  or  invested  for 
some  special  purpose.  Or,  it  may  happen  that  not  all  the 
dividends  declared  are  paid  at  the  time  a  balance  sheet 
is  taken  off.  For  any  or  all  of  these  reasons  the  surplus 
may  be  divided  and  set  apart  for  particular  purposes. 
Each  of  these  should  be  separately  considered  as  a  part 
of  the  problem  of  management  and  distribution  of  sur- 
plus. 

"A  Surplus,",  says  Doctor  Henry  R.  Hatfield,  "by 
whatever  name  it  may  be  called,  represents  additional  capi- 

168 


DISTRIBUTION  OF  THE  SURPLUS 

tal  (normally  derived  from  profits),  the  purposes  for  which 
it  is  created  may  be  any  of  those  for  which  capital  is 
needed,  or  it  may  be  used,  as  profits  ordinarily  are  used, 
to  provide  means  for  paying  dividends. ' '  ^  Generally 
speaking,  whether  the  surplus  be  hidden  or  shown  on  the 
face  of  the  balance  sheet,  the  proper  purposes  for  which 
the  surplus  may  be  set  aside  by  the  board  of  trustees  are 
the  following:  (1)  to  protect  the  corporate  estate;  (2) 
to  improve  the  esprit  de  corps  and  increase  the  efficiency  of 
the  personnel  of  the  service;  (3)  to  increase  the  business 
of  the  corporation  without  increasing  issues  of  share  or 
credit  capital;  (4)  to  reduce  the  funded  debt;  and  (5)  to 
equalize  dividends. 

Protection  of  the  Corporate  Estate. — At  the  discretion 
of  the  board  of  directors,  the  surplus  may  be  utilized  to 
protect  the  corporate  estate  against  impairment,  through 
a  series  of  continued  operating  losses.  One  method 
of  accomplishing  this  end  is  to  retain  for  the  use  of 
the  corporation  a  margin  of  undivided  profits  to  insure 
against  losses  which  may  be  due  to  fluctuations  in  the 
volume  of  business,  the  net  result  of  which  might  be  to 
decrease  the  corporate  estate.  American  railroad  history 
affords  many  illustrations  of  the  need  for  such  precaution. 
The  volume  of  business  of  the  railroads  is  one  of  the  best 
possible  indexes  of  general  business  conditions.  As  busi- 
ness becomes  more  active,  as  manufacturing  demands  in- 
crease, almost  in  like  proportion  demands  for  transporta- 
tion increase.  Conversely  every  decrease  in  production 
decreases  the  demand  for  transportation.  What  are 
known  as  periods  of  prosperity  and  depression  are  re- 
flected in  railroad  earnings  with  almost  the  same  precision 
that  they  are  on  the  transactions  of  commercial  houses, 
such  as  banks  and  clearing  houses.  It  goes  without  say- 
ing that  the  financial  managers  of  the  road  should  take 
into  account  such  possibilities;  that  they  would  be  eonsid- 

1  Ilatiield,  "Modern   Accounliiiy,"   239. 

169 


RAILROAD  FINANCE 

ered  short-sighted  not  to  provide  against  an  impairment 
of  capital  from  such  causes.  Ordinary  business  foresight 
would  suggest  the  desirability  of  keeping  a  margin  of  un- 
divided profits,  or  of  retaining  in  the  business  a  fund  which 
would  serve  to  insure  the  corporate  estate  against  impair- 
ment during  periods  of  business  depression.  Failure  to 
do  this  has  been  a  common  cause  of  receivership. 

A  second  purpose  for  which  a  fund  or  reserve  may  be 
created  out  of  surplus  is  to  insure  against  casualties,  such 
as  fire,  storm,  flood,  and  accident,  where  insufficient  pro- 
vision has  previously  been  made  through  current  charges 
against  revenue.  In  establishing  the  policy  of  the  cor- 
poration and  in  managing  its  affairs,  the  board  must 
decide  whether  the  corporation  will  incur  an  expense 
in  the  nature  of  premiums  paid  to  other  companies  for 
carrying  such  risks  or  carry  the  risk  itself.  Properties 
of  a  railroad  are  so  widely  distributed  and  so  variable  in 
character  as  to  enable  it  with  safety  to  its  creditors  and 
shareholders  to  carry  its  own  risk  at  a  much  lower  cost 
than  it  could  be  carried  by  other  companies.  By  setting 
aside  a  fund,  or  carrjnng  a  reserve  to  insure  itself  against 
fire  and  other  casualties,  it  is  able  to  apportion  or  distri- 
bute losses  evenly  over  a  term  of  years  without  being  re- 
quired to  pay  the  loading  expense  that  is  incident  to  ob- 
taining insurance  from  other  companies.  When  such 
charges  are  currently  made,  they  would  usually  become 
a  part  of  either  the  operation  or  income  account.  Such  a 
fund,  however,  may  be  established  by  setting  aside  a  part 
of  the  surplus. 

A  third  purpose  for  which  surplus  may  be  distributed 
is  to  create  a  fund  to  recoup  losses  from  bad  debts  or  to 
serve  as  a  reserve  to  protect  the  company  against  the  infi- 
delity of  officers  and  employees.  The  reasons  for  the 
company's  carrying  its  own  credit  and  fidelity  insurance 
are  practically  the  same  as  those  above  set  forth  for  carry- 

170 


DISTRIBUTION  OF  THE  SURPLUS 

ing  its  own  insurance  against  casualties.  The  margin  of 
saving,  however,  is  very  much  larger,  since  the  percentage 
of  actual  loss  to  the  corporation  from  bad  debts  and  from 
infidelity  is  relatively  small  compared  with  premiums 
which  would  be  paid.  This  also  may  be  accomplished  by 
setting  aside  a  part  of  the  surplus. 

A  further  provision  may  be  made  in  like  manner  for 
protection  of  the  corporate  estate  against  depreciation  due 
to  failure  to  maintain  the  property  against  wear  and  tear 
and  waste  from  the  elements.  In  similar  manner,  provi- 
sion may  be  made  for  lossCvS  or  deterioration  due  to  obso- 
lescence of  type  of  equipment  or  the  expiration  of  patents 
or  other  rights.  While  ordinarily  such  a  fund  would  be 
created  and  maintained  as  a  charge  in  the  nature  of  cur- 
rent expense,  and  as  such  would  be  a  deduction  from  earn- 
ings, failure  to  make  ample  provision  for  such  protection 
in  the  past  may  suggest  to  the  board  the  advantage  of 
direct  appropriation  from  surplus. 

Still  another  form  of  reserve  is  to  be  found  in  amounts 
set  aside  to  protect  the  corporation  against  loss  due  to 
speculation  in  its  securities,  or  to  protect  it  against  a  tem- 
porary impairment  of  its  credit.  Usually  this  function 
is  performed  without  a  definite  fund  having  been  provided 
or  appropriated.  It  is  not  an  uncommon  practice  for  a 
corporation's  officers  to  watch  the  market  in  order  that  the 
price  of  its  securities  may  not  be  unusually  or  harmfully 
depressed  by  traders  who  may  seek  to  obtain  advantage 
from  a  "raid."  In  some  jurisdictions  it  is  made  unlaw- 
ful for  a  company  to  trade  in  its  own  securities;  in  such 
event  it  would  be  unlawful  to  appropriate  or  set  aside  a 
fund  to  protect  its  securities  against  speculative  or  other 
trading.  Generally  speaking,  however,  a  corporation 
which  in  a  measure  depends  on  issues  of  new  securities 
for  funds  must  take  into  consideration  unfavorable  as 
weH  as  favorable  market  conditions.     And  it  may  be  fur- 

171 


RAILROAD  FINANCE 

tlier  said  that  whenever  it  is  desirable  to  make  some  defi- 
nite provision  for  protecting  the  market  price  of  its  securi- 
ties against  depreciation,  it  is  much  better  for  the  com- 
pany to  provide  for  funding  such  transactions  than  to 
have  it  done  surreptitiously  and  without  means  of  con- 
trolling the  acts  of  officers  who  otherwise  might  utilize  the 
financial  connections  of  the  company  for  personal  profit. 

Improvement  of  the  Personiiel. — The  use  of  the  surplus 
for  the  purpose  of  improving  the  esprit  de  corps  or  for  in- 
creasing the  efficiency  of  the  personnel  of  the  corporation 
takes  several  forms.  Amounts  may  be  set  aside  as  a  fund 
to  indemnify  employees  for  time  lost  and  personal  expense 
caused  by  illness,  injuries,  etc.  The  advantage  of  so 
doing  is  apparent.  The  sympathy  and  interest  of  employees 
is  a  valuable  asset  of  the  corporation.  It  not  only  tends  to 
increase  working  efficiency,  but  it  also  enables  the  corpo- 
ration to  deal  with  employees  on  a  more  favorable  wage 
basis.  To  the  same  end,  funds  may  be  provided  or  set 
aside  as  a  pension  fund.  This  may  be  done  through  an  ap- 
propriation from  surplus  or  through  a  direct  charge  against 
income.  In  like  manner  appropriations  may  be  made  for 
education,  recreation,  and  social  improvement  of  em- 
ployees. Thus  appropriations  are  made  to  local  branches 
of  Christian  associations ;  social  centers  are  established  and 
maintained  for  the  employees  of  a  particular  corporation ; 
and  contributions  may  be  made  to  social  organization  and 
entertainment  centers  which  are  established  and  main- 
tained for  the  benefit  of  several  railroads. 

Increase  of  Business. — IMore  frequently  than  for  other 
purposes  the  surplus  is  used  to  increase  the  business  of  the 
corporation  without  increasing  its  outstanding  shares  or 
bonded  debt.  To  this  end  surplus  may  be  appropriated 
for  extensions  into  new  territory  for  improving  the  facilities 
for  doing  business,  for  improving  the  road,  for  acquiring 
new  equipment  for  use  within  territory  already  occupied, 

172 


DISTRIBUTION  OF  THE  SURPLUS 

for  constructing  or  acquiring  enlarged  terminal  facilities, 
or  for  acquiring  properties  and  equipment  which  may  be 
used  in  collateral  enterprises  such  as  steamboats,  mines, 
quarries,  and  timber.  Assuming  that  added  properties  or 
equipment  are  desirable,  the  board  has  before  it  the  option 
of  deciding  whether  new  securities  will  be  issued  or  a  por- 
tion of  the  surplus  applied  to  such  use.  Frequently 
such  application  is  made,  however,  by  the  operating  head, 
without  the  creation  of  a  definite  fund  or  reserve. 
Thus  the  same  end  may  be  reached  as  far  as  resources  are 
concerned  without  affecting  the  balance  sheet.  Additional 
or  improved  bridges  may  be  built,  new  rolling  stock  pur- 
chased, or  new  or  improved  stations  and  office  build- 
ings erected,  and  the  cost  may  be  charged  directly  to 
expenses,  thereby  creating  a  hidden  reserve.  Again, 
leaseholds  may  be  acquired  and  treated  as  a  charge  against 
income  account  without  directly  affecting  the  surplus. 
The  results  of  such  practices  are  twofold;  the  expenses 
or  charges  against  income  are  inflated  without  warrant, 
and  the  properties  and  assets  thus  acquired  are  carried  as 
a  hidden  surplus,  i.  e.,  disappear  from  financial  state- 
ments. The  first  result  has  the  effect  of  misleading  share- 
holders and  the  public  both  as  to  the  cost  of  operation  and 
as  to  the  earning  power  of  the  enterprise.  The  second  re- 
sult is  to  enable  the  officers  or  other  persons  in  authority 
who  may  have  knowledge  of  the  facts  to  manipulate  the 
securities  of  the  corporation  to  their  own  advantage. 

Surplus  may  be  set  aside  to  increase  the  working  capital 
of  the  corporation ;  for  the  purpose  of  increasing  the  cash, 
stores,  and  other  assets  available  for  handling  the  current 
business,  or  for  increasing  credit  accounts  of  customei'S. 
Seldom,  however,  is  this  accomplished  through  a  definite 
appropriarion  or  funding  measure,  but  usually,  when  the 
surplus  is  not  hidden,  through  carrying  the  amounts  as 
undivided  profits  or  in  the  general  surplus  account. 

173 


RAILROAD  FINANCE 

A  further  use  of  surplus  for  increasing  the  business  of 
the  corporation  is  found  in  actions  taken  to  purchase  the 
securities  of  other  corporations.  This  is  one  of  the  most 
effective  methods  of  establishing  connections  and  obtaining 
more  effective  working  relations  with  other  lines. 

Reduction  of  the  Funded  Debt. — Many  considerations 
may  be  present  which  would  move  a  board  of  directors 
to  appropriate  or  set  aside  funds  for  the  reduction  of  the 
funded  debt.  Common  among  these  is  the  contractual 
obligation  established  at  the  time  bonds  are  issued,  creat- 
ing a  sinking  fund.  Under  such  contracts,  it  is  usually 
made  obligatory  to  set  aside  a  definite  amount  each  year 
which  when  invested  will  provide  the  means  for  retiring 
bonds  or  mortgage  indebtedness  when  due.  Without  such 
obligation  having  been  entered  into,  however,  and  as  a 
matter  of  policy,  it  may  be  deemed  expedient  to  reduce 
fixed  charges.  When  the  business  of  the  corporation  is 
unusually  large,  the  creation  of  such  a  fund  may  not  in- 
terfere with  the  declaration  of  dividends  which,  will  be 
satisfactory  to  shareholders;  and  in  time  of  business  de- 
pression or  lighter  traffic,  the  fund  may  operate  to  in- 
crease the  net  income  accruals  or  to  decrease  charges  to 
such  an  extent  as  to  protect  the  management  from  finan- 
cial embarrassment  and  even  make  possible  the  payment  of 
dividends.  Such  a  policy  would  have  the  effect  of  giving 
to  investment  greater  stability  and  to  the  management  the 
means  for  using  the  necessary  amount  of  earnings  to  keep 
the  property  in  condition  so  that  it  will  be  able  to  handle 
the  business  when  greater  demands  are  made  for  traffic. 

Equalizing  Dividends. — More  directl}^,  dividends  may 
be  equalized  by  appropriating  or  setting  aside  a  definite 
reserve.  When  a  road  is  so  located  that  it  must  depend 
for  earnings  largely  on  freight  traffic  and  on  long  haul 
business,  the  fluctuations  over  a  period  of  years  may  be 
so  great  that  without  such  a  reserve  it  would  be  impossible 

174 


DISTRIBUTION  OF  THE  SURPLUS 

to  pay  dividends  without  depleting  the  capital  invested. 
This  has  been  the  experience  of  such  roads  as  the  Union 
Pacific  and  the  Northern  Pacific.  As  a  result  of  efforts 
on  the  part  of  the  management  to  keep  securities  on  a 
dividend  basis  in  periods  of  light  business,  the  property 
was  neglected  and  receivership  followed. 

All  of  these  and  still  other  funding  purposes  may  be 
subserved  by  the  board  of  directors  in  the  exercise  of  their 
proper  discretion  in  the  management  of  surplus.  The 
shareholders  have  no  rights  to  any  part  of  the  earnings  or 
profits  until  a  definite  fund  has  been  set  aside  for  distribu- 
tion to  them  in  the  form  of  dividends.  Even  under  finan- 
cial arrangements  which  give  to  one  class  of  shareholders 
preferred  rights,  they  cannot  be  claimed  until  after  the 
board  has  decided  that  the  surplus  shall  be  so  used.  Pre- 
ferred shareholders  simply  have  a  prior  right  to  dividends 
when  declared ;  these  rights  to  be  exercised  pursuant  to 
contracts  made  at  the  time  the  shares  were  issued. 

The  limitations  of  discretion  which  are  placed  on  the 
management  in  so  far  as  they  relate  to  the  distribution  of 
surplus  are  to  be  found  in  the  contractual  relations  with 
creditors  and  other  persons  who  have  a  right  to  demand 
payment  without  regard  to  the  financial  condition  of  the 
corporation. 

Distribution  of  hivested  Surplus. — When  the  surplus  is 
put  back  into  permanent  properties,  or  invested  or  set 
aside  as  specific  reserves  for  purposes  other  than  divi- 
dends, it  is  not  usually  available  for  distribution  to  share- 
holders, for  it  becomes  so  far  merged  in  the  general  assets 
of  the  corporation  that  it  cannot  be  readily  converted  into 
cash.  Under  such  circumstances  the  only  methods  which 
the  board  may  utilize  to  enable  them  to  distribute  the  sur- 
plus as  dividends  are  either  to  issue  bonds  against  the  in- 
vested surplus,  to  declare  share  dividends,  or  to  distribute 
certificates  of  beneficial  interest  in  properties  which  are 

175 


RAILROAD  FINANCE 

not  essential  to  the  road.  Thus  in  1906  the  Great  North- 
ern railway,  through  the  subsidiary  Lake  Superior  com- 
pany, distributed  among  its  shareholders  certificates  of 
beneficial  interest  in  the  iron  lands  in  Minnesota  which 
had  been  obtained  in  the  interest  of  the  railway  company. 
The  Buffalo,  Rochester,  and  Pittsburgh,  the  same  year, 
turned  over  the  shares  of  the  Rochester  and  Pittsburgh 
Coal  and  Iron  company  to  the  Mahoning  Investment  com- 
pany, the  shares  of  which  were  distributed  proportionately 
among  the  shareholders  of  the  railroad.  In  conformity 
with  the  requirements  of  the  "commodities"  clause  of  the 
Hepburn  act,  the  Louisville  and  Nashville  in  1908  divested 
itself  of  its  interest  in  coal  and  timber  lands  by  distribut- 
ing among  its  shareholders,  shares  in  the  Louisville  Prop- 
erty company.  And  the  Delaware,  Lackawanna,  and 
Western  railroad  in  1909  similarly  distributed  shares  in 
the  Delaware,  Lackawanna,  and  Western  Coal  company. 
A  special  dividend  out  of  working  capital  may  be  de- 
clared when  the  assets  so  far  exceed  the  liabilities  of  the 
corporation  as  to  make  the  action  one  of  distribution  of 
profits  unnecessarily  withheld  from  shareholders.  In  such 
eases,  however,  there  is  need  for  the  exercise  of  careful 
judgment  to  determine  that  the  surplus  is  real.  In  other 
words,  the  directors  should  know  that  the  apparent  excess 
as  shown  by  the  accounts  has  not  been  the  result  of  neg- 
lecting to  make  ample  provision  for  expenses,  including 
depreciation.  The  Chicago  and  Alton  special  dividend  in 
1909,  which  followed  an  adjustment  of  accounts  and  a 
calculation  of  outlays  for  betterments  which  had  been 
made  during  a  long  period  of  years,  is  an  illustration  of 
the  abuses  which  are  possible  when  the  element  of  depre- 
ciation is  not  properly  considered  in  the  distribution  of 
surplus. 

Dividends    Representing    Subscribed    Surplus. — A    sur- 
plus which  has  been  obtained  by  subscription  may  be  dis- 

176 


DISTRIBUTION  OF  THE  SURPLUS 

tributed  as  dividends  provided  there  are  no  legal  restric- 
tions to  the  contrary.  If,  however,  this  part  of  the  capital 
has  been  merged  in  the  properties,  the  management  labors 
under  the  same  disability  as  it  would  with  a  similarly  in- 
vested surplus  which  has  been  earned.  Distribution  can 
take  place  only  by  the  issue  of  securities  to  the  public  for 
cash  or  by  distribution  of  securities  issued  to  shareholders. 


CHAPTER  XI 
ACCOUNTS   AND   STATISTICS 

The  need  for  accounts  is  a  need  for  information.  With 
the  development  of  a  complex  system  of  railroad  organiza- 
tion and  operation  there  arose  the  need  for  a  department 
which,  while  itself  handling  no  moneys,  might  account  for 
the  revenues  of  the  corporation,  prove  the  fidelity  of  those 
charged  with  collections  and  disbursements,  and  collect  and 
present  the  data  which  is  needed  by  the  management. 
The  trustees  have  special  need  for  some  agency  which 
may  report  the  result  of  administrative  policies  and  the 
efficiency  of  operative  officials.  Furthermore,  it  has  been 
found  necessary  to  have  an  office  of  records  and  accounts 
which  can  prepare  any  statement  required  by  administra- 
tive officials,  either  as  a  guide  to  management  or  as  a 
report  to  the  board  and  to  shareholders  and  governmental 
authorities. 

Development  of  the  Accounting  Department. — Railroad 
accounts  were  originally  kept  by  the  various  departments. 
Freight  agents  balanced  their  accounts  against  each  other 
before  reporting  to  the  general  bookkeeper,  who  entered 
the  final  results  of  all  subsidiary  accounts  in  the  general 
books  of  the  company.  There  was  no  attempt  at  the 
preparation  of  statistics  or  of  comparative  statements,  and 
the  directors  had  for  their  guidance  only  the  figures  rep- 
resenting gross  earnings,  expenditures,  and  net  income. 
In  some  companies  the  bookkeeper  was  subordinate  to  the 
general  manager,  in  others  to  the  secretary;  in  others,  as 
in  the  New  York  Central,  the  treasurer  was  in  control  of 
the  accounts ;  in  fact,  at  one  time  or  another  in  the  history 
of  the  various  companies  this  was  the  common  organiza- 

178 


ACCOUNTS  AND  STATISTICS 

tion  for  keeping  accounts.  This  private  corporate  prac- 
tice followed  the  public  concept  of  the  "finance  minister" 
as  the  proper  person  to  keep  and  render  accounts.  Later, 
however,  the  evils  of  this  practice  became  apparent.  Un- 
der these  conditions  there  could  be  no  adequate  control 
over  the  acts  of  those  who  handled  the  funds,  and  irregu- 
larities were  not  infrequent.  Furthermore,  the  treasurer 
was  interested  only  in  "cash"  transactions,  and  in  the 
fidelity  of  subordinates  or  others  handling  "cash." 
There  was  little  attempt  to  obtain  operating  data ;  there 
was  little  attempt  at  uniformity  of  method  in  the  operat- 
ing accounts  and  statistics. 

Inadequacy  of  Accounts  of  Early  Railroads. — As  con- 
solidation became  more  frequent,  the  confusion  was  in- 
creased; as  between  railroads  there  was  not  even  the 
semblance  of  uniformity.  As  department  heads  were 
judged  b}'  their  returns,  there  was  a  natural  tendency  for 
them  to  make  as  favorable  a  showing  as  possible,  and 
therefore  their  reports,  which  were  intended  to  serve  as 
administrative  guides,  were  misleading.  The  general 
bookkeeper  was  called  the  "auditor"  upon  some  roads, 
but  whatever  his  title,  his  authority  was  limited.  Said  a 
writer  in  1870: 

The  Auditor  of  many  of  our  proniinont  companies  is  a  boolj- 
lieeper, — notliiug  more  or  less,  and  a  blind  one  at  that.  He  re- 
ceives a  summary  of  the  accounts  from  many  different  depart- 
ments and  mechanically  enters  them  upon  his  books.  These 
accounts,  that  should  receive  the  nicest  scrutiny  and  elabora- 
tion before  reaching  him  in  this  condensed  form,  are  made  up 
in  departments  conducted  under  the  supervision  of  officers  who 
are  employed  because  of  their  especial  fitness  to  conduct  certain 
departments  connected  with  the  physical  operations  of  the  road. 
They  know  nothing  about  accounts;  and  if  they  did,  their  other 
labors  would  preclude  their  devoting  the  care  and  attention 
that  they  deserve.  The  result  is  that  the  officer  leaves  them  to 
his  chief  clerk,  who,   in   his  turn,  is,  of  necessity,  more  or  less 

179 


RAILROAD  FINANCE 

devoted  to  other  duties,    .    .    .    and    ...    the   examination, 
in  reality,  is  conducted  under  the  supervision  of  inferior  clerks.i 

As  a  means  of  remedying  these  nnneeessary  conditions, 
the  accounting  department  was  created  during  the  seven- 
ties as  an  independent  executive  branch.  With  the  growth 
of  business,  greater  demands  were  made  upon  this  de- 
partment. New  accounts  were  introduced,  and  new  meth- 
ods devised  to  meet  conditions  on  particular  lines;  but 
while  the  function  of  the  auditor  increased  in  usefulness, 
the   methods    on   different   lines   became   more   dissimilar. 

We  have  abundant  evidence  as  to  the  chaotic  condition  of 
the  accounts  upon  the  early  railroads.  In  1857  an  ex- 
amining committee  found  that  on  the  Boston  and  Provi- 
dence there  were  almost  no  safeguards  about  the  funds  of 
the  corporation.  Each  department  kept  its  accounts  ac- 
cording to  a  system  of  its  own,  and  as  there  was  no  official 
to  whom  all  reported,  no  one  man  was  in  touch  with  all 
of  the  accounts.  Payrolls  and  bills  for  supplies  were 
paid  without  examination  to  determine  their  clerical  ac- 
curacy, and  with  no  evidence  that  an  adequate  return  had 
been  received.  Agents  were  not  charged  with  unsold  tick- 
ets, and  the  collections  of  conductors  were  not  checked. 
A  record  was  kept  of  commutation  tickets,  but  as  the  con- 
ductors rarely  examined  these  tickets,  passengers  were 
allowed  to  ride  for  months  after  the  expiration  of  the 
periods  for  which  they  had  paid.-  The  condition  of  af- 
fairs disclosed  upon  this  railroad  was  little  worse  than  that 
which  prevailed  throughout  the  country  at  that  time. 
Even  as  late  as  1892  the  accounts  of  the  Western  Mary- 
land were  found  to  be  kept  according  to  the  most  primitive 
methods.     The  president  was  accustomed  to  report  earn- 

1  Stork.  "The  Department  of  Railroad  Accounts,"  Railroad  (la- 
tette,  I,  74. 

2  Report  of  the  committee  for  investigating  the  Boston  and  Provi- 
dence. 

18Q 


ACCOUNTS  AND  STATISTICS 

ings  and  expenses  as  they  accrued,  but  the  treasurer  en- 
tered thera  upon  the  books  only  as  they  were  received  or 
paid.  Thus  the  sum  of  $2,972,000,  representing  interest 
due  and  accrued  on  the  funded  debt,  was  not  recognized 
as  a  liability.  On  the  other  hand,  the  city  of  Baltimore 
was  credited  with  a  loan  of  $1,800,000,  the  amount  author- 
ized by  ordinance,  while  the  amount  actually  received  was 
$1,704,000.  The  registrar's  record  showed  that  $324,000 
of  preferred  stock  was  outstanding  in  excess  of  the  amount 
entered  upon  the  secretary's  books.  The  sura  of  $226,000, 
representing  funded  coupon  certificates,  had  been  carried 
as  an  asset  for  five  years  before  the  error  was  discovered. 
A  cash  item  of  $4300  in  the  current  report  was  reduced 
to  $3000  by  the  investigating  commission,  and  a  profit  and 
loss  credit  of  $453,000  was  adjusted  to  a  debit  of 
$3,417,000.3 

Progress  Toward  Uniformity. — So  long  as  accounting 
systems  were  adopted  without  reference  to  methods  em- 
ployed upon  other  railroads,  there  could  be  no  adequate 
standard  by  which  executive  officials  might  test  the  returns 
of  their  subordinates.  As  a  result,  in  many  companies 
insolvency  came  as  a  surprise  to  those  who  should  have 
been  familiar  with  actual  conditions.  Thus  the  president 
of  the  Central  of  New  Jersey  was  so  badly  deceived  by  the 
accounts  that  he  considered  the  company  sound  up  to  the 
eve  of  insolvency.  The  same  thing  occurred  upon  the 
Eastern  of  Massachusetts,  and  on  the  Boston  and  Port- 
land.* 

Effect  of  Publicity  Requirements  of  State  and  National 
Laws. — Under  such  conditions,  the  interests  of  holders  of 
railroad  securities  were  inadequately  protected.  The  as- 
sets might  be  carried  at  exaggerated  values,  so  that  an 
apparent  surplus  would  be  shown  where  there  was  a  deficit. 

8  Report  of  the  commission  to  investigate  the  Western  Maryland 
railroad  company  and  tiie   interest  of  the  city  therein. 
4  Sterue,  "Railroad  Question,"  29. 

181 


RAILROAD  FINANCE 

This  was  once  the  practice  of  both  the  Philadelphia  and 
Reading  and  the  Baltimore  and  Ohio.  It  was  to  remedy 
these  conditions  that  uniform  returns  were  early  required 
by  law  in  Massachusetts,  New  York,  and  other  states,  and 
by  congress  in  1887;  but  as  considerable  discretion  was 
necessarily  allowed  in  preparing  the  returns,  the  result 
was  not  equal  to  expectations.  While  such  laws  naturally 
served  to  promote  uniformity,  the  greatest  force  in  this 
direction  has  been  exerted  b}'  the  Association  of  American 
Railway  Accounting  Officers,  which  was  organized  in  1887. 
Up  to  the  time  when  this  association  wa,s  formed,  the 
freight  business  was  handled  on  local  waybills.  Railroads 
treated  other  lines  as  they  treated  shippers.  The  initial 
line  collected  its  charges  at  the  time  of  delivery  at  a 
junction  point,  and  each  connecting  line  re-billed  the 
freight  as  it  was  received.  Settlements  between  compa- 
nies were  arranged  by  agents  at  the  junctions,  or  by 
means  of  a  draft  of  the  agent  of  one  company  upon  the 
local  depositary  of  the  other,  and  there  was  little  occasion 
for  the  auditors  of  different  lines  to  have  any  communica- 
tion. These  methods  were  expensive  and  productive  of 
delay,  and  as  a  remedial  measure  there  was  devised  the 
system  of  interline  waybilling  which  is  in  use  to  a  greater 
or  less  extent  throughout  the  country.  This  has  necessi- 
tated uniformity  of  method,  and  through  this  as.sociation 
the  auditors  of  the  various  railroads  have  been  able  to 
bring  their   systems  into   comparative  harmony. 

Uniformity  Obtained  Under  the  Hepburn  Act. — Under 
the  act  to  regulate  commerce  (1887)  the  interstate  com- 
merce commission  was  authorized  to  require  annual  re- 
turns according  to  uniform  specifications,  but  until  the 
amendatory  act  of  1906,  the  commission  was  without  ade- 
quate authority  to  require  a  uniform  interpretation  of  the 
items  reported,  whether  by  different  companies  or  by  the 
same  company  in  different  years.     "It  is  evident,"  says 

182 


ACCOUNTS  AND  STATISTICS 

Doctor  Adams,  "if  annual  reports  are  to  serve  a  practical 
purpose,  that  they  should  be  made  with  a  common  under- 
standing of  the  terms  used  and  rest  upon  a  uniform  sys- 
tem of  accounts.  This  is  only  possible  where  the  rules  of 
accounting  have  the  authority  of  law,  from  which  it  may 
be  concluded  that  a  system  of  prescribed  accounts  having 
been  established,  the  annual  reports  will  assume  signifi- 
cance which  heretofore  they  have  not  borne,  especially 
from  the  point  of  view  of  judicious  discrimination  relative 
to  railway  securities. "  '^ 

Organization  of  Accounting  Department. — While  the  ac- 
counting department  is  coordinate  with  the  treasurer's 
department,  it  is  ordinarily  dependent  upon  no  official 
except  the  operating  head  of  the  company,  whether  presi- 
dent or  vice-president.  In  some  companies  the  chief  ac- 
counting officer  reports  directly  to  the  board  of  directors. 
By  this  means,  an  independent  agency  is  created  for  ob- 
taining information  and  an  effective  check  is  maintained 
over  the  acts  of  all  those  who  are  responsible  for  manage- 
ment as  well  as  over  those  who  are  concerned  with  the 
handling  or  the  custody  of  money.  The  work  of  the  ac- 
counting department  naturally  divides  itself  under  four 
heads — freight  receipts,  passenger  receipts,  disbursements, 
and  general  accounts.  In  small  companies,  the  auditor 
or  comptroller  has  direct  charge  of  all  these  branches,  and 
the  detailed  work  is  carried  out  under  the  supervision  of 
chief  clerks.  Usually,  however,  the  auditor  exerts  imme- 
diate control  over  only  the  general  accounts,  leaving  the 
matter  of  disbursements  and  receipts  to  subordinate 
auditors  who  work  under  his  general  direction.  The 
auditor  has  absolute  authority  over  the  forms  on  which 
the  accounts  in  all  departments  are  kept,  and  no  subordi- 
nate may  deviate  from  his  instructions  in  any  particu- 
lar.    He  is  thus   able   to   interpret   the   returns   as  they 

6  Adams,  "Railroad  Bonds  as  Securities  from  National  Banks,"  3. 

183 


RAILROAD  FINANCE 

are  made  to  him,  and  to  keep  in  such  close  touch  with 
the  affairs  of  the  company  that  he  can  at  any  time 
draw  off  from  his  records  any  statement  which  may  be 
required. 

General  Accounts. — The  auditor  has  direct  control  over 
the  general  ledger  and  over  such  subsidiary  ledgers  as 
may  be  required  to  record  the  particulars  of  transactions 
which  are  outside  the  jurisdiction  of  the  subordinate  aud- 
itors. The  general  ledger  is  the  book  of  final  record  into 
which  the  results  of  every  transaction  are  transferred  at 
the  end  of  each  month.  It  contains  only  such  entries  as 
are  approved  by  the  auditor  upon  properly  authorized 
vouchers  payable  and  bills  receivable  and  upon  journal 
vouchers  representing  the  net  results  of  the  subsidiary 
accounts.  The  purpose  of  the  auxiliary  ledgers  is  to  pro- 
vide for  a  detailed  record  of  each  transaction,  and  to  di- 
vide the  clerical  work  so  as  to  facilitate  the  performance  of 
routine.  The  auditor  usually  has  direct  charge  of  the 
ledgers  containing  accounts  with  other  companies  and  with 
individuals,  the  station  agents'  ledger,  and  the  freight- 
traffic,  passenger-traffic,  and  car-service  ledger.  On  some 
roads  the  auditor  keeps  a  copy  of  the  treasurer's  cash 
book;  on  all  roads  he  receives  daily  reports  from  the 
treasurer,  and  at  irregular  intervals  verifies  the  treasurer's 
cash  and  accounts.  Upon  the  basis  of  the  monthly  re- 
turns the  auditor  makes  drafts  for  balances  against  rail- 
roads, and  approves  drafts  upon  his  own  company  before 
they  may  be  paid  by  the  treasurer.  Every  auditor  has  a 
force  of  traveling  auditors  who  take  charge  of  the  installa- 
tion of  station  agents,  and  as  often  as  twice  a  year  ex- 
amine the  accounts  of  each  agent  to  prove  them  against 
the  periodical  reports  submitted  since  the  last  audited 
balance,  and  to  see  that  the  cash  is  sufficient  to  cover  the 
balance  in  favor  of  the  treasurer.  Some  companies  also 
have  traveling  accountants  who  examine  the  accounts  of 

184 


ACCOUNTS  AND  STATISTICS 

division  officers,  union  stations,  and  the  various  transpor- 
tation companies  operating  in  connection  with  the  rail- 
road. 

Freight  Auditor. — The  work  of  the  freight  auditor  has 
to  do  largely  with  the  verification  and  recapitulation  of 
agents'  reports,  the  entering  of  the  detailed  record  upon 
the  subsidiary  freight-accounts  ledger,  and  the  preparation 
of  summarized  entries  or  journal  vouchers  for  the  chief 
accounting  officer  to  record  in  the  freight  traffic  and  sta- 
tion agents'  ledgers  and  in  the  ledger  for  ** foreign"  line 
accounts.  In  accordance  with  instructions  from  the  traf- 
fic department,  the  freight  auditor  also  apportions  among 
interested  carriers  the  revenues  accruing  from  interline 
traffic.  The  basis  of  all  these  accounting  operations  is 
the  waybill. 

The  Waybill. — A  shipper  delivering  freight  to  a  local 
agent  submits  a  shipping  bill,  giving  a  description  of  the 
freight,  the  consignee,  and  the  destination.  In  return  the 
agent  issues  a  shipping  receipt.  This  may  be  exchanged 
by  the  shipper  for  a  bill  of  lading  if  a  negotiable  instru- 
ment is  desired,  but  the  contract  for  transportation  and 
safe  delivery  appears  upon  both  documents.  When  the 
freight  is  loaded  the  agent  prepares  a  waybill  which  con- 
tains a  memorandum  of  the  consignment,  together  with 
full  shipping  directions.  The  description  and  weight  of 
the  freight  is  given,  the  number  and  initials  of  the  car, 
the  route,  and  the  charge,  together  with  the  advances  and 
prepaid,  if  any.  One  copy  of  the  waybill  is  sent  to  the 
freight  auditor;  another  is  retained  for  the  office  record. 

Waybills  may  be  divided  into  four  classes:  (1)  local  way- 
bills covering  shipments  destined  to  points  on  the  issuing 
carrier's  line;  (2)  local  Avaybills  covering  shipments  des- 
tined to  points  on  other  lines;  (3)  interline  waybills  pro- 
viding for  junction  settlement;  (4)  interline  waybills  set- 
tled through  the  audit  office.     The  practice  of  interline  bill- 

185 


RAILROAD  FINANCE 

ing  is  general  among  Western  railroads,  but  it  is  not  so  ex« 
tensively  followed  in  the  South,  and  least  of  all  in  the  East- 
ern states.  All  interline  waybills  show  the  total  charge 
through  to  the  billing  destination,  or  to  the  last  junction 
or  pro-rating  point  on  the  route.  Usually,  and  at  all  times 
if  desired,  copies  of  such  waybills  are  sent  by  the  for- 
warding agent  to  the  freight  auditors  of  all  intermediate 
railroads  over  which  a  consignment  may  be  routed.  The 
original  waybill  accompanies  the  freight  to  its  destination, 
except  in  the  case  of  "manifest"  freight  and  ''time" 
freight,  which  demand  quick  service.  Such  freight  is  way- 
billed  upon  specially  colored  forms,  and  a  card  of  corres- 
ponding color  bearing  the  serial  number  of  the  waybill  is 
placed  on  the  outside  of  the  car,  while  the  bill  itself  is 
mailed  to  the  agent  at  the  billing  destination. 

While  ordinary  freight  is  en  route,  the  waybill  is  in  the 
possession  of  the  conductor.  Each  conductor  at  the  end 
of  his  run  notes  upon  the  bill  the  number  of  his  train,  and 
attaches  his  initials  before  delivery  to  the  agent.  If  the 
freight  is  weighed  en  route,  full  particulars  must  be  re- 
corded upon  the  waybill;  and  if  it  is  transferred  to  an- 
other car  or  diverted  from  the  original  destination,  the 
fact  must  be  noted.  When  at  its  destination  the  freight 
is  examined  by  the  receiving  agent  in  order  that  the  com- 
pany maj^  be  protected  in  the  event  of  claims  for  shortage 
or  damage.  The  waybills  are  also  tested  in  detail  to  de- 
termine the  propriety  and  accuracy  of  all  entries,  and  to 
make  it  certain  that  all  charges  have  been  applied  to  the 
consignment.  When  these  facts  are  established,  the  way- 
bill is  at  once  forwarded  to  the  freight  auditor,  card  way- 
bills being  attached  to  their  complementary  forms.  In 
the  case  of  interline  shipments,  the  freight  auditor  of  the 
delivering  road  retains  the  original  waybill,  as  a  notice 
of  arrival;  a  second  is  receipted  and  handed  to  the  con- 
signee when  freight  charges  are  paid. 

186 


ACCOUNTS  AND  STATISTICS 

Collections. — The  receiving  agent  is  responsible  in  all 
eases  for  the  collection  of  such  charges  as  are  not  prepaid, 
and  as  soon  as  the  waybill  is  corrected,  triplicate  freight 
bills  are  made  out.  One  copy  he  sends  to  the  con- 
signee, and  the  other  the  receiving  agent  retains 
after  taking  consignee's  receipt  for  property  therein. 
Remittances  are  made  daily  to  the  treasurer,  or 
to  certain  designated  local  depositories,  and  the  auditor 
is  notified  of  the  fact  in  order  that  proper  credit  may  be 
given.  Through  waybills  are  examined  at  junction  points 
by  the  agents,  who  from  the  point  of  view  of  the  initial 
carrier  are  the  receiving  agents. 

Agents'  Abstracts  of  Waybills  Forwarded  and  Received. 
— Every  station  agent  is  required  to  prepare  monthly  ab- 
stracts of  waybills  forwarded  and  received,  and  agents  at 
junction  points  must  in  addition  submit  junction  reports 
containing  a  record  of  all  through  waybills  delivered  to 
other  lines.  On  representative  railroads,  these  agents'  ab- 
stracts show  by  separate  groups  the  waybills  passing  from 
each  particular  station  to  all  destinations,  and  in  a  sim- 
ilar manner  are  shown  all  waybills  received.  The  freight- 
received  reports  include  each  month  some  waybills  dated 
in  the  preceding  month,  which  were  therefore  included  in 
the  forwarded  reports  of  the  month.  Similarly,  the  cur- 
rent forwarded  reports  include  the  record  of  some  waybills 
which  have  not  had  time  to  reach  their  destination.  Such 
waybills  are  separately  listed  by  the  freight  auditor  on 
"transit  sheets,"  and  the  footing  of  the  previous  month's 
transit  report  is  entered  upon  the  "forwarded"  side,  and 
the  current  month  on  the  "received"  side.  Thus  the  bal- 
ance is  effected;  for  the  total  of  freight  forwarded  must 
equal  the  total  of  freight  received,  added  to  the  total  in 
transit  or  not  received.  The  freight  auditor  submits  all 
waybills  to  final  test  to  determine  the  accuracy  of  the  ex- 
amination of  the  receiving  agents.     The  monthly  abstracts 

187 


RAILROAD  FINANCE 

are  then  cheeked  against  these  waybills,  and  the  abstracts 
of  waybills  forwarded  are  compared  in  the  fullest  detail 
with  the  abstracts  of  waybills  received. 

Interline  Balances. — The  monthly  abstracts,  together 
with  the  division  sheets  which  are  supplied  by  the  traffic 
department,  enable  the  auditors  to  arrive  at  a  basis  for 
settlement  on  interline  business.  Drafts  for  balances  are 
made  monthly,  though  drafts  for  approximate  balances 
are  permitted  each  week,  and  settlements  on  through 
freight  interchanged  at  junction  points  are  invariably 
made   weekly. 

Auditor  of  Passenger  Receipts. — It  is  the  function  of 
the  auditor  of  passenger  receipts  to  account  for  the  reve- 
nues from  the  sale  of  tickets  and  the  collection  of  cash 
fares,  to  apportion  them  among  the  companies  over  whose 
lines  tickets  have  been  sold,  and  to  record  the  detailed 
operations  of  this  department  in  a  subsidiary  passenger- 
accounts  ledger,  from  which  entries  may  be  furnished  to 
the  auditor  for  record  in  the  passenger  traffic  and  station 
agents'  ledger,  and  in  the  ledger  containing  accounts  with 
other  railroad  companies. 

Tickets. — The  greatest  part  of  passenger  revenue  is  re- 
ceived from  the  sale  of  tickets  by  local  agents  who  obtain 
their  supplies  through  requisitions  upon  the  general  ticket 
agent,  and  charge  rates  which  are  fixed  by  the  passenger 
traffic  department.  Tickets  are  of  many  kinds,  but  the 
standard  varieties  are  local  tickets  and  interline  or  coupon 
tickets.  Local  tickets  are  usually  printed  upon  single 
cards,  but  in  some  cases  they  are  made  in  two  sections,  one 
of  which  is  the  stub  upon  which  is  printed  a  full  record 
of  the  ticket.  This  stub  is  retained  by  the  selling  agent. 
Interline  tielcets  consist  of  a  contract  with  attached  cou- 
pons which  are  good  for  passage  over  successive  portions 
of  the  route  for  which  the  ticket  is  issued.     The  first  cou- 

188 


ACCOUNTS  AND  STATISTICS 

pon  is  the  agent's  stub,  and  this  is  detached  at  the  time 
of  sale.  There  are  many  special  varieties  of  passenger 
tickets — round  trip,  excursion,  commutation,  mileage, 
party,  clergy,  half-fare,  etc.  All  tickets  bear  serial  num- 
bers or  letters,  and  agents  are  charged  with  the  specific 
tickets  which  are  detailed  in  their  requisitions. 

Cancellations  and  Cash  Colhctions. — Upon  the  trains, 
tickets  are  taken  up  and  cancelled  by  the  conductors. 
Each  conductor  cancels  only  those  coupons  or  local  tickets 
which  are  destined  to  points  upon  his  run,  returning  the 
others  after  taking  a  record  of  each  one  so  honored.  Cash 
fare  receipts  are  issued  by  conductors  from  books  of  forms 
which  are  charged  against  them  by  the  auditor  of  passen- 
ger receipts.  These  receipts  are  in  duplicate,  half  going 
to  the  passenger  in  lieu  of  a  ticket.  In  some  cases  a  slight 
excess  fare  is  collected,  subject  to  the  provision  that  a 
corresponding  rebate  will  be  paid  by  any  agent  in  return 
for  the  passenger's  receipt.  These  receipts  are  forwarded 
by  the  agents  to  the  passenger  auditor's  office,  where  they 
are  checked  against  the  conductor's  returns.  Agents  keep 
a  daily  record  of  ticket  sales,  showing  in  detail  the  tickets 
sold  and  the  amounts  received.  They  are  also  required 
to  submit  a  form^^-l  monthly  report,  supported  by  the  stubs 
torn  from  the  tickets  sold.  Conductors  send  to  the  auditor 
at  the  end  of  each  run  all  cancelled  tickets  and  cash  fare 
receipts,  and  they  prepare  a  full  report  monthly.  Agents 
and  conductors  are  required  to  remit  collections  daily  to 
the  treasurer  or  to  a  depository. 

At  the  passenger  auditor's  office,  the  monthly  reports 
of  agents  are  compared  with  the"r  daily  records  of  ticket 
sales.  Tickets  taken  up  by  conductors  are  assorted  accord- 
ing to  various  classifications,  and  the  accuracy  of  fares  is 
determined  by  reference  to  agents'  reports.  Entries  are 
finally    prepared    for    the    passenger-traffic    and    station 

189 


RAILROAD  FINANCE 

agents'  ledgers.  Revenues  on  foreign  coupons  sold  by 
agents  of  the  company  are  apportioned  according  to 
schedules  prepared  by  the  passenger  traffic  department. 

Interline  Ticket  Reports. — Each  month  the  passenger 
auditor  compiles  an  interline  ticket  report,  which  shows  in 
detail  the  revenues  accruing  to  every  line  over  which  the 
company  has  sold  coupon  tickets.  Similar  reports  are  re- 
ceived from  other  railroads,  and  these  are  carefully  tested 
to  determine  that  the  company  has  been  allotted  its  due 
proportion  of  the  revenues.  From  these  reports  are  drawn 
totals  which  are  entered  upon  the  passenger-accounts 
ledger,  and  which  are  submitted  for  entry  in  the  passen- 
ger-traffic ledger  and  in  the  ledgers  devoted  to  accounts 
with  "foreign"  lines  and  with  station  agents  and  conduc- 
tors. 

Auditor  of  Dishursements. — It  is  important  that  all  rev- 
enues accruing  to  a  company  be  turned  into  the  treasury 
without  loss;  it  is  no  less  important  that  the  funds  in  the 
treasury  should  not  be  withdrawn  except  for  proper  pur- 
poses ;  that  the  full  amounts  are  expended  for  the  purposes 
announced;  and  that  a  fair  return  is  received  for  the 
money.  It  is  the  function  of  the  auditor  of  disbursements 
or  auditor  of  expenditures  thus  to  safeguard  the  treasury 
of  the  railroad.  He  cannot  veto  improper  expenditures, 
but  he  may  refuse  to  give  them  validity  by  placing  the 
records  of  such  transactions  upon  his  books.  The  sub- 
sidiary ledgers  kept  in  this  department  are:  the  record  of 
vouchers  audited,  the  record  of  bills  audited,  and  the  ma- 
terials-and-supplies  ledger.  Transcripts  of  the  footings 
of  these  accounts  are  submitted  monthly  to  the  chief  ac- 
counting office  for  entry  in  the  general  ledger. 

Payrolls. — Expenditures  incident  to  railroad  operation 
are  created  en  account  of  labor,  materials,  use  of  facilities 
of  other  railroads,  and  claims.  Labor  is  paid  through  the 
medium  of  a  payroll,  which  is  prepared  by  the  operating 

190 


ACCOUNTS  AND  STATISTICS 

offices  directly  in  charge  of  the  employees,  from  the  time 
record  aud  a  schedule  of  wages  furnished  by  authority  of 
the  ranking  officers  of  the  department.  Accompanying 
the  payroll  is  a  summary  showing  the  distribution  of  the 
charges  among  the  accounts  of  the  company.  When  certi- 
fied by  the  maker,  the  payroll  is  passed  to  the  chief  operat- 
ing officer,  and  when  approved  by  him,  it  is  sent  to  the 
auditor  of  disbursements  for  audit,  and  finally  to  the  chief 
accounting  officer  for  warrant.  Increases  in  forces  or  in 
wages  must  be  authorized  by  the  chief  operating  officer. 
When  paid,  the  receipted  payroll  is  returned  to  the  chief 
accounting  officer,  who  credits  the  treasurer  with  the 
amounts  expended.  When  payment  of  wages  is  made  by 
check,  the  checks  are  drawn  by  the  chief  accounting  officer 
against  the  payroll  and  passed  to  the  treasurer,  who  ar- 
ranges for  their  distribution  through  the  local  agents. 
Cancelled  checks  are  examined  by  the  treasurer,  and  when 
verified  are  returned  to  the  chief  accounting  officer  for 
credit  upon  the  general  books. 

Requisitions  for  Materials  and  Supplies. — Materials  and 
supplies  are  generally  bought  by  the  purchasing  agent  on 
requisitions  approved  by  the  proper  operating  officer,  and 
invoices  in  triplicate  are  required  from  the  vendors.  One 
invoice  goes  to  the  storekeeper  to  whom  the  purchase  is 
consigned,  another  to  the  auditor  of  disbursements,  and 
the  third  to  the  purchasing  agent.  The  storekeeper  checks 
his  invoice  against  the  shipment  and  sends  it  to  the  pur- 
chasing agent,  who  thereupon  issues  a  voucher  in  favor  of 
the  vendor.  This  voucher  is  passed  to  the  chief  operating 
officer  for  approval,  and  to  the  auditor  of  disbursements, 
who  authorizes  payment  by  the  treasurer.  The  auditor  of 
disbursements  keeps  separate  ledger  accounts  with  each 
storekeeper,  posting  from  the  vouchers  of  the  purchasing 
agent  and  the  requisitions  of  operating  officers  for  ma- 
terials.    These  requisitions  are  required  from  the  officer  in 

191 


RAILROAD  FINANCE 

immediate  charge  of  the  work  for  which  the  materials  are 
to  be  used.  They  are  summarized  by  the  storekeepers, 
who  submit  a  report  each  month  to  the  auditor  of  dis- 
bursements. 

Vouchers. — For  all  operating  expenditures  except  labor, 
vouchers  are  required.  This  applies  not  only  to  material 
disbursements,  but  also  to  contract  payments  and  miscel- 
laneous expenditures.  The  vouchers  are  prepared  by  the 
operating  officer  directly  in  charge  of  the  work  causing 
the  expense,  and  when  approved  by  the  ranking  officer  in 
the  operating  department,  they  are  sent  to  the  auditor  of 
disbursements.  Each  voucher  shows  what  materials  have 
been  used  and  the  purpose  of  their  use,  and  when  certified 
by  the  responsible  officer,  it  is  evidence  to  the  accounting 
department  of  the  propriety  of  the  expense.  Vouchers  are 
often  issued  in  duplicate,  one  part  showing  the  accounts 
to  be  charged  together  with  the  certification  of  the  operat- 
ing officer  and  of  the  auditor  of  disbursements,  the  other 
showing  the  approval  of  the  chief  operating  officer  and 
of  the  chief  accounting  officer  and  the  receipt  of  the 
payee. 

Distribution  and  Classification  of  Expense. — Railroads 
provide  employees  with  schedules  to  enable  them  to  make 
proper  distribution  of  charges  upon  the  vouchers.  These 
schedules  follow  the  classification  of  the  interstate  com- 
merce commission.  Four  classifications  of  operating  ex- 
penses have  been  prescribed  by  the  commission — the  orig- 
inal in  1888,  a  first  revision  in  1894,  a  second  revision  in 
1901,  under  the  act  to  regulate  commerce,  and  a  third  re- 
vision in  1907  under  authority  of  the  Hepburn  act,  together 
with  a  supplement  to  this  edition  in  1908.  As  finally  re- 
vised under  the  original  act,  the  scheme  provided  for  dis- 
tribution of  expenses  under  four  general  accounts,  each 
of  which  was  made  up  of  various  primary  accounts. 
Maintenance    of    Way   and    Structures   included    ten    ac- 

192 


ACCOUNTS  AND  STATISTICS 

counts;  Maintenance  of  Equipment,  nine;  Conducting 
Transportation,  thirty-seven;  and  General  Expenses, 
seven — a  total  of  fifty-three.  The  classification  now  in 
force  increases  the  number  of  general  accounts  to  five  and 
the  primary  accounts  to  one  hundred  and  sixteen.  Main- 
tenance of  Way  and  Structures  now  eomprehends  twenty- 
three  accounts;  Maintenance  of  Equipment,  twenty-nine; 
Traffic  Expenses,  eight;  Transportation  Expenses,  forty- 
five;  and  General  Expenses,  eleven.  The  new  general  ac- 
count was  added  to  make  it  possible  "to  separate  the  ex- 
penses of  soliciting  traffic  from  the  expenses  incident  to 
hauling  the  traffic";  and  the  number  of  primary  accounts 
was  increased  to  "permit  a  more  careful  analysis  of  the 
cost  of  transportation. ' ' " 

Authority  for  these  requirements  is  given  in  that  part 
of  the  Hepburn  act  which  reads:  "The  Commission  may, 
in  its  discretion,  prescribe  the  forms  of  any  and  all  ac- 
counts, records,  and  memoranda  to  be  kept  by  carriers 
subject  to  the  provisions  of  this  Act,  .  .  .  and  it  shall 
be  unlawful  for  such  carriers,  to  keep  any  other  accounts, 
records  or  memoranda  than  those  prescribed  by  the  Com- 
mission.    .     .     ."^     In  announcing  the  new  classification, 

6  Interstate  Commerce  Commission,  Statistics  of  Kailways,  1906 : 
10. 

7  34  Stat,  at  large,  593.  Massachusetts  early  conferred  upon  the 
board  of  railroad  commissioners  authority  to  prescribe  the  form  of 
accounts  ( R.  S.  1902,  c.  Ill,  §83).  Some  of  the  other  states  which 
have  similar  laws  are  California  (L.  1911,  c.  20,  c.  53),  Minnesota 
(R.  L.  1905,  §1984  as  amended  L.  1907,  c.  410),  Nebraska  (L. 
1907,  c.  90),  New  Hampshire  (L.  1911,  c.  164),  New  Jersey  (L. 
1911,  e.  195),  Now  York  (L.  1907,  c.  429),  Ohio  (L.  1911:  549), 
Oregon  (L.  1907,  c.  53),  Vermont  (L.  1906,  no.  126),  Wash- 
ington (L.  1909,  c.  93),  and  Wisconsin  (L.  spec.  sess.  1905,  c.  13). 
The  Maryland  leyislature  in  1910  (L.  1910.  c.  108)  passed  a  com- 
mission law  modeled  upon  that  of  New  York.  California,  Maryland, 
New  Hampshire,  New  Jersey,  New  York,  Oregon,  and  Wisconsin 
require  that  their  commissions  shall  prescribe  forms  which  shall 
conform  to  those  imposed  by  federal  authority.  Vermont  requires 
conformity  as  far  as  practicable  with  the  systems  in  the  other  New 
England  state.s,  New  York,  and  ("anada. 

1^  193 


RAILROAD  FINANCE 

however,  the  commission  gave  notice  that  any  carrier- 
would  be  permitted  to  subdivide  any  primary  account  re- 
quired for  its  purposes,  and  to  assign  the  amount  charged 
to  any  such  primary  account,  to  operating  divisions,  to 
individual  lines,  or  to  states,  provided  a  list  of  such  sub- 
primary  accounts  and  assignments  be  first  filed  with  the 
commission  subject  to  its  disapproval.  It  also  granted  per- 
mission to  keep  any  temporary  or  experimental  accounts 
designed  to  increase  operative  efficiency,  but  such  accounts 
must  not  impair  the  integrity  of  any  general  or  primary 
account,  and  they  must  be  open  to  inspection  by  the  com- 
mission.^ 

Interline  Balances. — Bills  of  other  railroads  on  account 
of  balances  for  car  service,  trackage  rentals,  and  other 
interline  claims  are  passed  through  the  office  of  the  auditor 
of  disbursements  before  receiving  the  approval  of  the  chief 
accounting  officer.  Records  of  car  movements  are  kept 
by  the  car  accountant,  who  is  usually  attached  to  the  op- 
erating department,  but  in  some  cases  to  the  accounting 
department.  Every  railroad  requires  from  junction 
agents,  reports  of  cars  leaving  the  line;  and  as  cars  are 
interchanged,  the  user  notifies  the  owner  daily.  IMonthly 
service  reports  are  interchanged,  showing  the  specific  cars 
used  and  the  exact  number  of  days.  Upon  receipt  of  a  bill 
the  daily  reports  are  checked  against  the  monthly  sum- 
maries, and  when  verified  and  approved,  a  draft  is  hon- 
ored for  the  amount  due.  Joint  trackage  rentals  are  com- 
piled upon  the  basis  of  data  in  the  car  accountant's  office, 
and  bills  are  rendered  and  paid  as  approved,  as  in  the  case 
of  settlements  of  car  service  balances.  In  the  classification 
of  operating  accounts  as  prescribed  by  the  interstate  com- 
merce commission,  provision  is  made  for  the  handling  of 
joint-facilities  accounts  in  such  a  manner  that  the  reports 

8  Interstate  Commerce  Commission,  Classification  of  Operating 
Expenses,  third  revised   issue,  with  supplement. 

194 


ACCOUNTS  AND  STATISTICS 

of  each  carrier  shall  not  only  accurately  represent  its  own 
operations,  but  that  they  shall  be  so  presented  as  to  show 
for  each  carrier  concerned  the  particular  expense  charge- 
able to  operating  revenues,  and  that  finally  when  com- 
bined for  statistical  purposes  with  the  reports  of  ail  the 
carriers  they  should  contribute  no  error  to  the  total  either 
by  way  of  duplication  or  omission." 

Claims. — Claims  for  overcharge,  shortage,  and  damage 
are  first  passed  upon  by  the  station  agent  with  whom  they 
are  filed,  and  if  their  validity  is  established  they  are  paid 
and  a  voucher  is  sent  to  the  chief  accounting  officer  for 
credit  upon  the  station  agents'  ledger.  When  paid  in  this 
manner  and  credited  upon  the  ledger,  the  amount  of  a 
claim  is  thrown  into  a  suspense  account  until  the  liability 
for  the  charge  is  determined.  An  interline  claim  is  paid 
by  the  company  with  which  it  is  originally  filed,  but  not 
until  the  other  railroads  concerned  have  given  their  ap- 
proval. Claim  agents  sometimes  pay  by  check  upon  a 
blanket  voucher,  which  is  prepared  monthly  for  disburse- 
ments of  this  nature. 

Classification  of  Operating  Revenues. — In  its  business  of 
furnishing  transportation,  a  railroad  incurs  expenses  and 
receives  revenues  which  are  interrelated,  each  earning  ne- 
cessitating a  certain  expenditure,  and  each  expense  tending 
to  produce  a  certain  revenue.  The  current  record  appears 
in  the  operating  account.  In  this  account  the  expense 
items  are  limited  to  the  five  general  heads  prescribed  by 
the  interstate  commerce  commission.  On  the  credit  side 
belong  the  items  of  revenue  from  freight,  passengers,  mail, 
express,  and  miscellaneous  sources.  Until  1907  the  inter- 
state commerce  commission  did  not  dictate  the  manner  of 
presenting  operating  revenues.     Carriers  are  now  required, 

9  Adams,  "Government  Supervision  of  Railway  Accounts,"  Gov- 
ernment Accoimtant,  T,  ;]G8-n;  Interstate  Commerce  Coninut?3ioii, 
Accounting  Series  Circular,  no.  14;  Statistics  of  Railways,  \90U: 
11-2. 

195 


RAILROAD  FINANCE 


however,  to  show  their  earnings  under  two  general  ac- 
counts, Revenue  from  Transportation — made  up  of  eleven 
primary  accounts,  and  Revenue  from  Operations  Other 
Tlian  Transportation — composed  of  ten  primary  accounts. 
As  in  the  case  of  operating  expenses,  the  commission  per- 
mits the  keeping  of  sub-primary  and  temporary  accounts. 
This  classification,  which  is  designed  as  a  complement  of 
the  classification  of  operating  expenses,  is  based  upon  the 
principle  "that  transportation  revenues  should  be  confined 
to  the  revenue  flowing  from  those  sources  supported  by  the 
expenses  charged  to  operating  expenses,"^"  and  its  pur- 
pose is  to  show:  "first,  the  amount  earned  for  the  trans- 
portation of  freight,  upon  which  should  be  based  the  com- 
putation of  revenue  per  ton  per  mile,  and  of  revenue  per 
freight  train  mile;  second,  the  amount  earned  for  the 
transportation  of  passengers,  from  which  may  be  computed 
the  revenue  per  passenger  per  mile ;  third,  the  amount 
earned  from  all  transportation  on  passenger  trains,  from 
which  may  be  computed  the  revenue  per  train  mile ;  fourth, 
other  revenue  from  transportation  service,  namely,  switch- 
ing revenue,  special  train  revenue,  and  miscellaneous 
transportation  revenue."" 

The  operating  account,  therefore,  must  appear  in  this 
form: 


Dr. 
Maintenance    of    Way    and 

Structures 
Maintenance  of  Equipment 
Traffic   Expenses 
Transportation    Expenses 
General  Expenses 
Total   Operating   Expenses. 


Revenue 

tion 
Revenue 

Other 

tion 


Cr. 
from    Transporta- 

from     Operations 
than    Transporta- 


Total  Operating  Revenues. 


10  Interstate     Conunerce     Commission,     Statistics     of     Railways, 
1906:    12. 

11  Interstate    Commerce    Coiumission,    Classification    of    Operating 
Revenues,  first  issue,  with  supplement. 

196 


ACCOUNTS  AND  STATISTICS 

Operating  Account. — The  difference  between  these  totals 
gives  Net  Operating  Revenues,  and  it  is  this  result  which 
determines  the  efficiency  of  the  operating  department. 
The  operating  account  is  a  constituent  part  of  the  Income 
Account,  but  as  ordinarily  presented  the  income  account 
includes  nothing  of  operation  except  the  net  result,  from 
which,  according  to  the  new  ruling  of  the  commission, 
taxes  must  be  deducted  to  shovv^  Operating  Income. 

Income  and  Profit  and  Loss  Accounts. — According  to 
this  plan,  only  those  items  which  apply  to  an  entire 
year  and  which  are  special  to  that  year  appear 
in  the  income  account.  Up  to  1907  the  form  of 
income  account  prescribed  by  the  interstate  commerce 
commission  provided  for  credit  items  comprising  net 
operating  revenue,  rentals,  interest  and  discount,  re- 
turn on  securities  owned,  and  miscellaneous  income, 
the  aggregate  of  which  yielded  Total  Income.  From 
this  were  deducted  taxes,  rentals,  interest  upon  bonds  and 
floating  debt,  leaving  as  a  balance,  Net  Income,  also  called 
"Nominal  Surplus."  From  this  balance,  it  was  custom- 
ary to  deduct  dividends  and  appropriations  to  reserve 
funds,  leaving  Surplus,  which  added  to  the  balance  for- 
w^arded  from  the  account  of  the  preceding  period  consti- 
tuted Profit  and  Loss  Surplus.  This  item  was  carried  to 
the  General  Balance  Sheet  direct  or  through  the  medium 
of  a  Profit  and  Loss  Account,  according  to  the  policy  of 
individual  companies.  The  purpose  of  a  profit  and  loss 
account  is  to  provide  for  charges  which  are  not  special  to 
any  given  year.  The  appropriations  for  sinking  funds  and 
ear  trust  payments  are  ordinarily  made  through  this  ac- 
count, as  are  extraordinary  expenditures  and  adjustments 
of  various  sorts.  In  some  cases  dividends  are  paid  through 
this  account,  but  this  is  contrary  to  the  purpose  for  which 
the  account  is  kept;  for  dividends  are  properly  chargeable 
against  the  earnings  of  the  period  in  which  they  are  de- 

197 


RAILROAD  FINANCE 

clared.  Most  railroads  have  not  seen  fit  to  keep  a  profit 
and  loss  account,  but  have  provided  for  adjustments 
through  the  income  account.  Through  the  ruling  of  the 
interstate  commerce  commission  all  companies  now  keep 
an  income  account  and  also  a  profit  and  loss  account.  Va- 
rious reasons  are  advanced  to  show  the  necessity  for  a  re- 
vised income  account.  As  under  the  new  classifications  of 
operating  expenses  and  operating  revenues  all  payments 
and  receipts  which  are  in  the  nature  of  rents  are  excluded 
from  the  operating  account;  and  as  rents  differ  in  their 
nature  and  are  for  the  most  part  intercorporate  paymente, 
it  is  necessary  to  show  each  variety  separately  in  the  in- 
come account  in  order  to  avoid  duplications  and  omissions 
when  the  reports  of  all  carriers  are  consolidated.  Further- 
more, it  is  desirable  to  distinguish  between  operating  and 
contractual  income  and  the  complementary  charges,  and 
the  net  corporate  income  constituting  the  fund  from  which 
deductions  may  be  made  only  by  vote  of  the  directors. 
To  this  end  not  only  an  income  account,  but  also  a  profit 
and  loss  account  is  necessary.  Tlie  prescribed  forms  of 
these  accounts  are  as  follows: 

Upon  the  income  account  the  first  item  is  gross  operating 
revenues,  from  which  operating  expenses  are  deducted, 
leaving  net  operating  revenues,  to  which  are  added  the  net 
revenues  from  outside  operations.^-  From  this  is  de- 
ducted taxes,  leaving  net  operating  income.  To  net  op- 
erating income  are  added  the  net  credit  balance  from  rent 
for  hire  of  equipment,  joint  facilities,  and  miscellaneous 
sources,  rents  received  from  lease  of  roads,  the  net  credit 
balance  from  operations  of  subsidiary  lines,  interest  and 
dividends  received  on  shares,  bonds,  and  sundry  securities, 

12  A  special  classification  of  reveinies  and  expenses  for  outside 
operations  has  been  put  into  effect,  to  "include  all  operations  for 
which  special  arbitraries  or  allowances  are  covered  in  the  rate  for 
special  services  other  than  rail  transportation,  or  for  which  an 
additional  collection  is  made  from  shippers,  consignees,  passengers, 

198 


ACCOUNTS  AND  STATISTICS 

and  miscellaneous  income — the  aggregate  constituting 
Gross  Corporate  Income.  With  these  are  the  complemen- 
tary debit  entries;  net  debit  balance  from  outside  opera- 
tions, net  debit  balance  from  rents  for  hire  of  equipment, 
joint  facilities  and  miscellaneous  sources,  rents  paid  for 
lease  of  road,  net  debit  balance  from  operations  of  sub- 
sidiary lines,  interest  on  current  debt,  interest  on  funded 
debt,  sinking  fund  accounts,  and  other  deductions.  The 
aggregate  of  these  charges  (or  such  as  are  operative  in  any 
particular  case)  against  gross  corporate  income  leaves  Net 
Corporate  Income,  out  of  which  dividends  may  be  declared, 
and  appropriations  made  for  reserves,  additions  and  bet- 
terments, and  miscellaneous  purposes.  The  balance  is  the 
Surplus  for  the  year. 

The  surplus  from  the  current  income  account  added  to 
the  profit  and  loss  surplus  of  the  preceding  period  provides 
the  principal  credit  item  in  the  profit  and  loss  account. 
To  this  may  be  added  sundry  credits,  and  against  it  may 
be  charged  similar  debits  at  the  discretion  of  the  directors. 
Provision  must  also  be  made  here  for  charges  on  account 
of  dividends  declared  out  of  surplus.  The  balance  is  the 
profit  and  loss  surplus  (or  deficit)  for  the  period,  which  is 
carried  to  the  General  Balance  Sheet.^^ 

The  General  Balance  Sheet. — The  general  balance  sheet 

contains  a  full  statement  of  all  accounts  on  the  general 

or  others  for  a  special  service  performed.  They  also  include  opera- 
tions designed  or  used  to  furnish  products  or  services  not  directly 
connected  M'ith  rail  transportation." — Interstate  Commerce  Cora- 
mission,  Accounting  Scries  Circular,  no.  10.  This  therefore  applies 
to  water  and  trolley  lines;  express  lines;  sleeping  car,  restaurant, 
elevator,  and  dock  service ;  storage  and  cotton  compress  plants ;  and 
the  like.  It  is  the  purpose  of  this  classification  to  separate  trans- 
portation expenses  and  revenues  from  the  expenses  and  revenues 
incident  to  the  commercial  activities  of  carriers,  and  thus  to  facili- 
tate the  checking  up  of  the  arbitraries  and  allowances  in  transporta- 
tion agreements  and  operating  contracts. — Interstate  Commerce 
Commission,  Classification  of  Revenues  and  Expenses  for  Outside 
Operations,   first   issue;    Statistics  of   Railways,    190(5:    10-1. 

13  Interstate   Commerce   Commission,   Accounting  Series   Circular, 
no.  19. 

199 


RAILROAD  FINANCE 

ledger.  Its  items  are  classified  as  assets,  which  are  shown 
upon  the  debit  side,  and  liabilities  which  appear  upon  the 
credit  side.  Assets  have  been  usually  divided  into  two 
classes.  Capital  assets  consist  of  the  railroad  property 
and  franchise,  equipment,  securities,  real  estate,  and  re- 
serve funds  in  trust  or  in  cash.  Current  or  working  as- 
sets are  those  which  are  being  realized  upon  in  the  ordi- 
nary course  of  business,  and  which  theoretically  might  be 
converted  into  cash  in  the  event  of  necessity.  Such  are 
balances  from  agents  and  conductors,  accounts  and  bills 
receivable  from  other  railroads,  transportation  companies, 
and  individuals,  advances  to  branch  lines,  material  and 
supplies  on  hand,  and  sundry  "quick"  assets.  Capital 
liabilities  consist  of  shares,  representing  ownership,  and 
bonds  of  various  classes,  representing  the  funded  obliga- 
tions of  the  property.  Current  liabilities  are  divided  into 
"floating  debt,"  represented  by  loans,  and  bills  and  ac- 
counts payable,  and  operating  liabilities,  represented  by 
traffic  balances,  payrolls  and  vouchers,  reserve  accounts, 
interest,  dividends  and  taxes  accrued,  and  sundry  liabili- 
ties. The  balance  of  the  profit  and  loss  account  is  entered 
on  the  balance  sheet  on  the  credit  or  debit  side,  according 
as  it  represents  a  surplus  or  a  deficit,  thus  completing  the 
balance.  Such  was  the  balance  sheet  as  it  was  formerly 
kept.  In  connection  with  its  plans  for  a  comprehensive 
system  of  railroad  accounts  the  interstate  commerce  com- 
mission has  prescribed  a  form  of  statement  designed  to 
classify  the  items  covered  so  as  to  permit  "a  strict  inter- 
pretation of  the  words  'assets'  and  'liabilities,'  a  clear 
definition  of  'accounts,'  and  entries  so  comprehensive  that 
all  important  operating  and  financial  transactions  may  be 
duly  reflected."^*  Provision  is  accordingly  made  for  the 
segregation  of  Assets  into  five  primary  accounts.  Prop- 
erty Owned  as  Investment,  with  six  sub-primary  accounts; 

I*  Adams,  "Railroad  Bonds  as  Securities  from  National  Banks,"  6. 

200 


ACCOUNTS  AND  STATISTICS 

Working  Assets,  with  eight  sub-primary  accounts ;  Accrued 
Income  Not  Due;  Deferred  Debit  Items,  with  ten  sub-pri- 
mary accounts;  and  Profit  and  Loss  Balance.  Liabilities 
are  to  be  divided  among  seven  primary  accounts,  Stock, 
with  three  sub-primary  accounts;  Mortgage,  Bonded  and 
Secured  Debt,  with  three  sub-primary  accounts;  Working 
Liabilities,  with  eight  sub-primary  accounts;  Accrued  Lia- 
bilities Not  Due,  with  two  sub-primary  accounts ;  Deferred 
Credit  Items,  with  four  sub-primary  accounts;  Appro- 
priated Surplus,  with  two  sub-primary  accounts;  and 
Profit  and  Loss  Balance.^^ 

A  further  object  contemplated  in  drawing  up  the  new 
form  is  to  present  the  true  costs  of  the  property  of  a  car- 
rier by  including  among  its  assets  separate  items  to  show 
roadway,  equipment,  other  physical  property,  and  securi- 
ties acquired  through  deductions  from  income  or  charges 
against  surplus.  Such  additions  under  the  old  system  dis- 
appeared through  the  profit  and  loss  account,  with  the 
result  that  an  indefinite  hidden  surplus  was  reflected 
but  not  definitely  shown  upon  the  balance  sheet.^*' 

The  following  explanation  has  been  given  by  the  statis- 
tician of  the  commission  as  to  the  form  of  general  balance 
sheet  statement  as  promulgated: 

The  chief  difficulty  in  drafting  a  satisfactory  balance  sheet 
statement  arises  from  the  different,  and  to  some  extent  conflict- 
ing, interests  concerned,  which,  for  the  sake  of  explicit  state- 
ment, may  be  defined  as — 

(a)     The  interest  of  the  management, 

15  Interstate  Commerce  Commission,  Form  of  General  Balance  Sheet 
Statement,   first  revised   issue. 

i<5  Additions  to  property  throngli  an  increase  in  capital  liabilities 
are  provided  for  in  a  classification  of  expenditures  for  road  and 
equipment  comprising  three  general  accounts:  Road,  Equipment, 
and  General  Expenses.  These  are  made  up  of  forty-eight  sub-pri- 
mary accounts  of  wliich  Road  comprises  thirty-seven;  Equipment, 
six;  and  General  Expenses,  six. — Interstate  Commerce  Commission, 
(Classification  of  Expenditures  for  Road  and  Equipment,  first  revised 
issue,  with  supplement. 

201 


RAILROAD  FINANCE 

(b)  The  interest  of  the  investor,  and 

(c)  The  interest  of  the  public. 

The  chief  aim  of  those  who  administer  the  property  is  U 
maintain  the  credit  of  the  business  placed  in  their  hands.  It 
is  therefore  the  purpose  of  the  management  to  develop  the  prop- 
erty without  a  corresponding  increase  in  outstanding  securities. 
This  is  true  for  the  reason  that  the  wider  the  margin  between 
the  value  of  the  property  to  which  the  corporation  has  title 
and  the  amount  of  securities  outstanding  against  the  property, 
the  stronger  will  be  the  credit  of  the  company  and  the  greater 
its  ability  to  borrow  fresh  capital  in  time  of  need.  This  is 
the  explanation  of  what  has  been  termed  the  "American  system 
of  railway  financiering,"  which,  during  the  last  thirty  years, 
has  led  to  enormous  expenditures  for  new  construction  and  for 
additions  and  betterments,  without  corresponding  charges  to  the 
property  accounts.  It  is  also  doubtless  an  explanation  of  the 
fact  that  those  who  manage  American  railways  have  seldom 
thought  it  wise  to  set  up  in  the  property  accounts,  through  cur- 
rent or  periodic  inventories,  the  results  of  changes  in  the  valua- 
tion of  real  estate  or  of  fluctuations  in  the  market  values  of 
material  and  labor.  It  thus  becomes  evident  why  the  measure- 
ment of  "cost  of  property"  acceptable  to  the  management  is  not 
the  money  expended  in  the  construction  or  the  development  of 
the  property  of  the  corporation,  but  the  securities  which  must 
be  issued  in  order  to  obtain  the  necessary  funds  for  construction 
and  development ;  and,  as  long  as  balance  sheets  are  constructed 
with  exclusive  regard  to  the  interest  of  the  management,  it  will 
not  be  possible  to  read  from  them  the  investment  cost  of  the 
property. 

The  interest  of  the  stockholder,  on  the  one  hand,  so  far  as  the 
accounting  record  of  charges  to  property  accounts  is  concerned, 
is  at  variance  with  that  of  the  management.  It  is,  of  course, 
true  that  the  trustees  of  the  property — that  is  to  say,  the  board 
of  directors  and  the  officials  who  represent  them — may  also  be 
stockholders,  and  much  of  the  "high  finance"  of  recent  years  has 
resulted  from  the  temporary  substitution  by  the  management  of 
the  stockholder's  interest  for  the  legitimate  interest  of  the  man- 
agement. The  stockholder  is  the  residuary  proprietor  of  all  of 
the  company's  assets  not  covered  by  outstanding  obligations,  and 
it  is  to  his  interest  that  the  value  of  the  property  should  be  in- 
creased without  a  corresponding  increase  in  the  number  of  shares 
which  have  a  proprietary  claim  upon  the  property.    This  is  true 

202 


ACCOUNTS  AND  STATISTICS 

for  the  reason  that  the  value  of  the  shares  will  iucrease.  other 
things  being  equal,  with  the  increase  of  the  property  which  they 
represent,  and  in  a  properly  constructed  balance  sheet  a  stock- 
holder should  be  able  to  reach  the  true  book  value  of  his  prop- 
erty, and  deduce  from  it  the  basal  market  value  of  each  share. 
The  stockholder's  interest  is  expressed  in  valuation.  His  in- 
terest in  the  business  is  that  of  an  investor,  and  he  desires  to 
apply  the  rules  and  principles  of  commercial  valuation  to  his 
investments.  He  desires  also  to  have  as  high  a  statement  of  the 
property  accounts  as  the  commercial  conditions  of  the  business 
warrant,  in  order  that  he  may  protect  the  value  of  his  investment 
by  showing  how  great  is  the  value  of  the  property  used  in  ren- 
dering the  service  for  which  the  public  pays.  There  is  a  marked 
tendency  in  recent  years  toward  the  commercial  valuation  of  rail- 
way properties  for  the  purpose  of  making  use  of  that  valuation 
to  resist  a  reduction  in  passenger  or  freight  rates,  and  it  is 
consequently  of  great  importance  to  the  stockholder  that  uniform 
and  reasonable  rules  should  be  followed  in  arriving  at  a  prac- 
ticable, usable,  and  equitable  statement  of  the  property  accounts. 

The  interest  of  the  public,  which  is  the  third  interest  involved 
in  the  property  accounts  of  railways,  rests  upon  the  fact  that 
a  reasonable  rate  for  transportation  services  is  a  rate  which 
contributes  a  reasonable  return  upon  necessary  investments,  and 
a  satisfactory  balance  sheet  from  the  public  point  of  view  is  one 
which  shows  what  has  been  actually  invested  in  the  property. 
The  public  therefore  has  the  right  to  demand  that  the  property 
ledger  should  record  every  item  of  property  which  an  appraiser 
would  find,  should  an  appraisement  be  undertaken,  and  from  the 
point  of  view  of  the  public  at  least,  the  figures  entered  on  the 
property  ledger  against  the  several  items  of  property  there  re- 
corded should  be  the  amount  of  money  actually  spent  in  creating 
the  property  rather  than,  as  the  management  desires,  the  amount 
of  securities  issued,  or,  as  the  stockholder  desires,  the  commercial 
valuation  of  the  property. 

The  Form  of  General  Balance  Sheet  Statement  submitted  to 
the  Commission  and  promulgated  under  an  order  of  June  21, 
1909,  was  constructed,  primarily,  under  the  influence  of  the  third 
interest  above  described.  The  chief  aim  of  this  statement  is 
to  record  such  an  analysis  of  assets  and  liabilities  as  will  result 
in  a  complete  statement  of  the  situation.  Investment  value, 
rather  than  securities  issued  or  commercial  valuation,  is  made 
the  corner  stone  of  this  statement,  and  provided  the  records  of 

203 


RAILROAD  FINANCE 

the  carriers  can  be  adjusted  to  this  conception,  there  will  be 
found  in  the  balance  a  figure  which  may  be  accepted  as  a  start- 
ing point  for  computing  the  amount  which  the  public  may  be 
called  upon  to  contribute  in  passenger  and  freight  rates.i^ 

The  balance  sheet  is  the  final  exhibit  of  the  financial  con- 
dition of  a  company,  showing  the  property,  its  ownership, 
and  the  nature  and  extent  of  the  claims  against  it.  In 
this  statement  appears  the  resultant  of  every  transaction 
of  the  period  covered,  but  its  absolute  figures  in  themselves 
have  little  value.  It  is  only  when  viewed  in  comparison 
with  the  balance  sheets  of  preceding  periods,  and  when  the 
differences  are  traced  through  the  interrelated  items  of 
subsidiary  statements  that  it  may  be  properly  interpreted. 

Statistical  Functions  of  the  Accounting  Department. — 
While  it  is  the  principal  function  of  the  accounting  depart- 
ment to  test  and  record  financial  items,  it  serves  also  as  a 
statistical  bureau  for  the  preparation  of  statements  for  the 
guidance  of  administrative  officials.  There  is  little  sem- 
blance of  uniformity  in  either  the  methods  or  the  or- 
ganization of  the  statistical  work  among  different  rail- 
roads. In  some  instances  there  is  a  statistical  department 
as  a  coordinate  branch  of  the  accounting  department. 
Usually,  however,  the  work  is  divided  among  various 
branches  of  the  operating  and  accounting  departments. 
Thus  the  superintendent  of  motive  power  compiles  the  de- 
tailed reports  of  locomotive,  car,  and  train  performance; 
the  freight  auditor  prepares  the  statistics  of  freight  traffic 
and  revenue;  the  passenger  auditor  prepares  the  statistics 
of  passenger  traffic  and  revenue;  and  the  auditor  of  dis- 
bursements shows  the  distribution  of  expense. 

Importance  of  Operative  Statistics. — The  importance  of 
statistics  as  an  aid  to  administration  was  not  appreciated 
by  the  first  generation  of  railroad  men,  w^ho  were  essen- 

17  Interstate  Commerce  Commission,  Statistics  of  Railways,  1908: 
10-2. 

204 


ACCOUNTS  AND  STATISTICS. 

tially  builders  and  not  operators.  Their  chief  concern  was 
to  increase  gross  earnings,  often  regardless  of  net  revenue, 
and  they  kept  in  touch  with  matters  of  operation  only  in 
a  general  way.  But  individual  railroads  have  increased 
to  such  dimensions  that  it  is  impossible  for  general  officers 
to  exert  proper  control  over  the  acts  of  subordinates  except 
by  means  of  statistics.  Moreover,  the  railroad  men  of  to- 
day have  been  trained  in  operation,  and  they  have  ad- 
vanced to  a  point  where  statistics  are  regarded  as  essential 
as  a  basis  of  administrative  judgment.  Whenever  plans  for 
new  undertakings  are  considered,  elaborate  statistical 
compilations  are  prepared  before  judgment  is  passed. 
Railroads  are  operated  under  widely  different  conditions), 
and  their  statistical  needs  and  methods  necessarily  vary, 
but  it  is  possible  to  detail  certain  practices  which  are  fairly 
representative.  Upon  most  railroads  a  monthly  operating 
sheet  is  prepared  upon  which  is  recorded  by  operating  di- 
visions and  districts  the  distribution  of  operating  expenses, 
together  with  statistical  units  and  averages  showing  the 
results  of  this  distribution.  From  the  data  thus  presented, 
it  is  possible  for  administrative  officers  to  test  the  effi- 
ciency of  their  subordinates,  and  to  balance  roughly  units 
of  expenditure  against  units  of  receipts.  Nothing  like  ab- 
solute results  may  be  obtained,  however;  for  while  a  cer- 
tain proportion  of  items  may  be  allocated  with  exactness, 
others  must  be  applied  arbitrarily. 

Units  of  Measurement. — The  units  of  railroad  transpor- 
tation are  the  "ton-mile"  and  the  "passenger-mile."  The 
ton  mile  is  a  ton  of  freight  moved  one  mile.  Similarly,  the 
passenger  mile  is  a  passenger  moved  one  mile.  The  "com- 
mercial" ton  mile  is  the  unit  of  revenue  freight;  the  "net" 
ton  mile,  of  total  freight;  and  the  "gross"  ton  mile,  of 
total  freight  added  to  the  weight  of  the  cars.  The  unit  of 
transportation  service  between  terminals  is  the  "train 
mile."     The   "car  mile"   is   the   unit   of   car   movement. 

205 


RAILROAD  FINANCE 

The  "engine  mile"  and  the  "traction  ton  mile"  are  the 
most  common  units  of  performance.  The  former  is  the 
unit  of  miles  run  per  locomotive;  the  latter,  the  product 
of  multiplying  the  weight  of  a  locomotive  on  its  drivers 
by  the  number  of  miles  run.^^  The  unit  of  property  is  the 
"mileage  of  road."  None  of  these  factors  furnish  an  ab- 
solute standard  of  measurement;  for  modifying  influences 
are  exerted  by  the  different  varieties  of  traffic  and  the  dif- 
ferent circumstances  of  each  individual  haul.  It  is  pos- 
sible, however,  by  means  of  these  units  to  obtain  certain 
averages  of  performance,  of  expense,  and  of  revenue. 

As  measures  of  performance,  the  averages  ordinarily 
appearing  upon  the  operating  sheet  are  any  or  all  of  the 
following:  ton  and  passenger  miles  per  car,  per  train,  and 
per  road-mile — indicating  density  of  traffic;  gross  ton 
miles  per  traction  ton  mile — indicating  general  operative 
efficiency;  tons  of  coal  per  gross  ton  mile — indicating  loco- 
motive efficieucy;  length  of  haul  per  ton  and  per  passen- 
ger— indicating  character  of  traffic.  As  an  indication  of 
the  efficiency  of  car  movement  and  of  the  relative  direc- 
tion of  the  traffic,  the  empty  and  loaded  car  mileage  in 
each  direction  is  also  given;  and  average  costs  are  shown 
per  ton  mile,  per  passenger  mile,  and  per  train  mile,  for 
station,  yard,  engine,  and  train  service.  Freight  earnings 
are  shown  per  ton  mile,  per  car  mile,  per  engine  mile,  per 
train  mile,  and  per  road  mile;  and  a  similar  exhibit  is 
made  of  passenger  earnings. 

Distribution  of  Expense. — In  order  to  arrive  at  the  re- 
sults shown  on  the  operating  sheet,  it  is  necessary  first  to 
make  a  division  between  those  expenses  which  are  directly 
chargeable  to  transportation  service  and  those  which  are 
of  an  indirect  nature,  and  to  apportion  these  charges  be- 
tween passenger  and  freight  traffic.     It  is  tlie  business  of 

18  Tlie  Interstate  Commerco  Commission  in  1007  promulgated  a 
classification  of  locomotive-miles,  car-miles,   and  train-miles. 

206 


ACCOUNTS  AND  STATISTICS 

a  railroad  to  sell  transportation,  and  to  this  end  it  main- 
tains and  operates  a  roadway  and  track,  terminals,  and 
equipment.  It  incurs  in  this  way  certain  expenses  which 
represent  the  cost  of  transportation.  The  cost  of  moving 
trains  and  handling  passengers  at  terminals  are  direct  in 
their  nature.  Under  this  head  also  belong  costs  of  loco- 
motive and  train  service,  fuel  and  supplies,  repairs  and 
maintenance  of  equipment,  station  and  switching  service, 
and  supplies.  Indirect  expenses  are  those  which  are  inde- 
pendent of  the  handling  and  movement  of  traffic.  They 
include  depreciation  of  roadway  and  structures,  part  of 
depreciation  of  ties,  and  many  items  of  general  expense. 
Some  expenses  may  be  readil}^  apportioned  between  pas- 
senger and  freight  traffic.  The  two  divisions  of  the  traf- 
fic department  are  separately  maintained,  and  many  of  the 
functions  of  the  transportation  department  are  concerned 
with  specific  services.  Passengers  and  freight  are  carried 
in  separate  cars  and  generally  upon  different  trains,  and 
they  are  handled  in  different  parts  of  terminal  stations. 
The  resulting  expense  therefore  may  be  definitely  assigned ; 
and  this  applies  also  to  depreciation  of  equipment  and  to 
claims  for  loss,  injury,  and  damage.  But  there  are  many 
other  items  of  expense  which  may  be  allocated  only  upon 
Bome  arbitrary  basis.  Both  varieties  of  traffic  are  hauled 
over  the  same  line,  and  each  contributes  to  the  deteriora- 
tion of  the  permanent  way.  Moreover,  at  local  stations 
and  at  the  general  offices  there  are  many  expenses  which 
are  common.  In  the  matter  of  allotting  such  expenses, 
there  is  little  uniformity.  The  proper  units  of  cost  for 
this  purpose,  according  to  Woodlock,  are:  (1)  for  direct 
expenses  incident  to  movement  of  trains,  the  train  mile ; 
(2)  for  maintenance  and  operation  not  due  to  train  mile- 
age, the  road  mile;  (3)  for  station  and  terminal  expenses, 
the  passenger  and  the  ton;  (4)  for  general  expenses,  the 
relative  gross  earnings.     According  to  the  same  authority, 

207 


RAILROAD  FINANCE 

the  proper  basis  for  the  apportionment  of  cost  of  the  fore- 
going classes  between  passenger  and   freight   traffic   are : 

(1)  the  passenger  and  freight  train  mileage,  considering 
switching  mileage  as  an  integral  part  of  freight  train  mile- 
age, and  charging  the  freight  train  mile  with  about  twenty 
per  cent,   more  expenses  than  the  passenger  train  mile; 

(2)  the  relative  gross  earnings;  (3)  when  not  stated  sep- 
arately, the  relative  gross  earnings;  (4)  the  passenger  and 
freight  train  mileage.^® 

This  has  been  accepted  with  some  modifications  by  the 
railroad  commission  of  Wisconsin,  which  in  the  maximum 
passenger  rate  case  went  further  in  the  direction  of 
applying  the  principles  of  cost  accounting  to  transporta- 
tion than  was  hitherto  considered  practicable.  The  com- 
mission holds,  however,  that  as  passenger  train  mileage 
and  freight  train  mileage  do  not  represent  the  same  quan- 
tities, they  should  not  be  used  in  apportioning  direct  trans- 
portation expenses.  It  proposes  as  a  more  equitable 
method,  the  division  of  common  expenses  on  the  basis  of 
those  which  may  be  actually  separated.  This  method  is 
also  put  forward  as  a  substitute  for  the  apportionment  of 
general  expenses  upon  the  basis  of  gross  earnings,  on  the 
ground  that  there  is  no  intimate  relation  between  expenses 
and  earnings.  This  is  in  harmony  with  the  methods  em- 
ployed in  cost  accounting  in  industrial  establishments.^*^ 

What  the  operating  sheet  shows  of  the  efficiency  of  the 
transportation  department  as  a  whole,  the  locomotive  and 
car  performance  sheets  show  in  detail.  These  statements, 
which  are  usually  compiled  in  the  statistical  department 
from  returns  furnished  by  the  operating  officers,  make  pos- 
sible adequate  control  over  the  operation  of  individual  lo- 
comotives and   the  distribution  of  rolling  stock. 

19  Woodlock,  "Ton  Mile  Cost,"  96-7.  Robinson,  "Principles  In- 
volved in  the  Determination  of  Railway  Rates,"  Yale  Rev.,  XVI,  382-4. 

20  Buell  V.  Chicago,  Milwaukee,  and  St.  Paul,  1  W.  R.  C.  R.  385-499. 
(1907). 

208 


ACCOUNTS  AND  STATISTICS 

The  Operating  Balio. — The  ratio  of  operating  expenses 
to  gross  earnings  is  sometimes  considered  an  indication  of 
the  efficiency  of  the  transportation  department,  and  the 
operating  ratios  of  different  railroads  are  often  compared 
to  determine  relative  economy  of  operation.  But  the  trans- 
portation department  has  full  control  of  only  one  of  the 
five  items  of  operating  expense.  It  is  not  concerned  with 
the  matter  of  traffic,  or  general  expense,  and  its  expendi- 
tures for  maintenance  of  way  and  equipment  are  generally 
regulated  by  the  directors.  As  administrative  policies 
vary,  the  operating  ratios  upon  different  railroads  are  fig- 
ured upon  entirely  different  basis.  The  most  that  can  be 
said  is  that  when  maintenance  charges  are  adequate,  the 
lower  the  operating  ratio,  the  higher  the  grade  of  efficiency. 
The  new  requirements  of  the  interstate  commerce  commis- 
sion concerning  the  uniform  reporting  of  maintenance  and 
betterment  expenditures  will  undoubtedly  increase  the 
value  of  this  ratio  as  a  test  of  performance.  The  undue 
importance  which  has  been  attached  to  the  operating  ratio 
has  seriously  interfered  in  many  instances  with  the  effi- 
ciency of  the  traffic  department,  for  with  the  emphasis 
upon  heavy  train  loads  much  traffic  has  been  delayed,  with 
the  result  that  certain  varieties  of  high  grade  freight  have 
been  lost  which  under  normal  conditions  would  have  been 
offered  for  shipment. 

Freight  Statistics. — Operating  statistics  are  concerned 
with  the  relation  of  performance  to  expense,  and  they  are 
valuable  as  tending  to  show  how  expenses  may  be  reduced 
per  unit  of  performance.  The  traffic  department,  however, 
looks  to  revenues,  and  traffic  statistics  are  valuable  only  as 
they  show  how  earnings  may  be  increased.  Until  within 
recent  years  little  attention  has  been  given  to  statistics  of 
this  sort,  and  all  carriers  have  handled  much  traffic  without 
means  of  knowing  whether  it  would  add  to  revenue.  Prog- 
ress has  now  been  made  to  a  point  where  it  is  possible  to 
15  209 


RAILROAD  FINANCE 

show  the  relation  of  the  average  revenue  from  each  com- 
modity to  the  average  expense  of  handling  all  freight  traf- 
fic, and  so  indicate  whether  probable  expenses  are  being 
met.  The  more  progressive  railroads  compile  traffic  sta- 
tistics which  enable  them  to  show  what  they  make  upon 
each  class  of  traffic  handled.  This  is  done  by  deriving 
from  the  agents '  abstracts  of  waybills  ' '  monthly  commodity 
units,"  which  show  in  a  single  item  the  movement  of  each 
commodity  between  any  two  stations  on  the  line,  giving 
particulars  as  to  weight,  ton  miles,  and  earnings.  The 
units  are  then  filed  by  commodities,  and  the  abstracts  are 
filed  in  calendar  order  by  stations.  From  these  files  the  sta- 
tistical department  can  furnish  information  regarding  any 
variety  of  traffic,  and  the  business  of  any  station  or  shipper. 

Passenger  Statistics. — Comparatively  little  attention  is 
given  to  the  statistics  of  passenger  traffic  except  as  is  nec- 
essary to  fulfill  the  requirements  of  state  and  national  gov- 
ernments for  periodical  reports.  The  averages  M^hich  are 
ordinarily  worked  out  have  already  been  considered  in  an- 
other connection.  Passenger  business  is  in  a  certain  sense 
an  adjunct  to  the  freight  business,  and  trains  may  be  kept 
in  operation  to  accommodate  profitable  centers  of  freight 
traffic  even  when  the  direct  receipts  afford  little  profit. 
It  is  possible,  however,  for  a  railroad  to  know  the  earnings 
of  every  passenger  train  on  its  line,  and  to  adjust  its 
schedules  so  as  to  furnish  the  greatest  practicable  return. 

Reports. — Railroads  close  their  accounts  monthly,  and 
prepare  a  formal  income  account  and  balance  sheet  for  the 
scrutiny  of  the  executive  officials  and  directors.  Many 
companies  also  compile  a  weekly  estimate  of  gross  earn- 
ings which  is  published  with  the  financial  news  of  the  day. 
All  are  now  required  to  submit  to  the  interstate  com- 
merce commission,  monthly  statements  of  earnings  and  ex- 
penses. All  such  statements  are  accompanied  by  the 
figures  of  the  preceding  period  in  order  that  necessary 

210 


ACCOUNTS  AND  STATISTICS 

comparisons  may  be  made.  With  few  exceptions,  railroads 
must  prepare  three  separate  annual  reports — one  for  sub- 
mission to  the  state  railroad  commission,  another  for  the 
interstate  commerce  commission,  and  a  third  for  the  share- 
holders. The  forms  of  the  first  two  are  dictated  by  gov- 
ernmental authority;  the  third  may  be  prepared  to  suit 
the  wishes  of  the  directors.  With  regard  to  the  returns 
to  the  interstate  commerce  commission,  section  twenty  of 
the  Hepburn  act  reads: 

The  Commission  is  hereby  authorized  to  require  annual  reports 
from  all  eommou  carriers  subject  to  the  provisions  of  this  Act, 
and  from  the  owners  of  all  railroads  engaged  in  interstate  com- 
merce as  defined  in  this  act,  to  prescribe  the  manner  in  which 
such  reports  shall  be  made.  .  .  .  Such  annual  reports  shall 
"  show  In  detail  the  amount  of  capital  stock  issued,  the  amounts 
paid  therefor,  and  the  manner  of  payment  for  the  same ;  the 
dividends  paid,  the  surplus  fund,  if  any,  and  the  number  of 
stockholders ;  the  funded  and  floating  debts  and  the  interest  paid 
thereon ;  the  cost  and  value  of  the  cari-ier's  property  franchises, 
and  equipments ;  the  number  of  employees  and  the  salaries  paid 
each  class ;  the  accidents  to  passengers,  employees,  and  other  per- 
sons and  the  causes  thereof;  the  amounts  expended  for  Im- 
provements each  year,  how  expended,  and  the  character  of  such 
improvements ;  the  earnings  and  receipts  from  each  branch  and 
from  all  sources ;  the  operating  and  other  expenses ;  the  balance 
of  profit  and  loss ;  and  a  complete  exhibit  of  the  financial  opera- 
tions of  the  carrier  each  year,  including  an  annual  balance  sheet. 
Such  reports  shall  also  contain  such  information  in  relation  to 
rates  or  regulations  concerning  fares  or  freights,  or  agreements, 
arrangements,  or  contracts  affecting  the  same  as  the  Commission 
may  require ;  and  the  Commission  may,  in  its  discretion,  for  the 
purpose  of  enabling  it  the  better  to  carry  out  the  purposes  of 
this  act,  prescribe  a  period  of  time  within  which  all  common 
carriers  subject  to  the  provisions  of  this  Act  shall  have,  as  near 
as  may  be,  a  uniform  system  of  accounts,  and  the  manner  in 
which  such  accounts  shall  be  kept. 

Said  detailed  reports  shall  contain  all  the  required  statistics 
for  the  period  of  twelve  months  ending  on  the  thirtieth  day  of 
June  in  each  year,  and  shall  be  made  out  under  oath  and  filed 

211 


RAILROAD  FINANCE 

with  the  Commission,  at  its  office  in  Washington,  on  or  before 
the  thirtieth  day  of  September  then  next  following,  unless  ad- 
ditional time  be  granted  in  any  case  by  the  Commission.  .  .  . 
The  Commission  shall  also  have  authority  to  require  said  carriers 
to  file  monthly  reports  of  earnings  and  expenses  or  special  re- 
ports within  a  specified  period. 

Inadequacy  of  Early  Reports. — Railroad  reports  to 
shareholders  have  been  generally  lacking  in  information 
necessary  to  a  proper  understanding  of  the  condition  or 
prospects  of  the  property.  Some  of  the  early  railroad 
companies  showed  a  disposition  to  acquaint  shareholders 
with  the  essential  facts,  but  so  wretched  was  the  condition 
of  accounts  that  this  was  impossible.  A  writer  in  the 
Edhiburgh  Review  in  1834  commented  favorably  upon  the 
"copious  and  satisfactory"  reports  of  the  Baltimore  and 
Ohio,  contrasting  them  with  the  meager  statements  put 
forth  by  the  Liverpool  and  Manchester,  but  his  remarks 
had  reference  to  the  large  amount  of  technical  informa- 
tion which  was  of  value  not  so  much  to  shareholders  as  to 
the  directors  of  other  roads.^^  In  an  editorial  in  the 
American  Railroad  Journal  in  1852,  appeared  this  criti- 
cism, presumably  written  by  Henry  V.  Poor,  of  the  in- 
adequacy of  contemporary  railroad  reports:  "Very  few  of 
the  exhibits  issued  by  railroad  companies  come  up  to  the 
requirements.  .  .  ,  From  a  great  many  of  them,  no 
distinct  idea  whatever  can  be  formed  of  the  condition  of 
the  companies.  Everything  is  stated  in  general  terms. 
We  cannot  tell  how  much  a  road  has  cost,  how  much  will 
be  necessary  to  complete  it,  nor  whether  the  money  ex- 
pended has  been  well  laid  out  or  wasted.  So  with  its 
operations.  Receipts  and  expenses  are  stated  in  gross,  and 
nothing  given  by  which  a  person  can  form  a  correct  esti- 
mate of  the  actual  results."^- 

21  "Improvements  in  Inland  Transport-Railroads,"  Edinburgh  Rev., 
LX,  124. 
22Amer.  Railroad  Jour.,  XXV,  88. 

212 


ACCOUNTS  AND  STATISTICS 

These  remarks  may  be  properly  applied  to  reports  of 
much  later  date.  In  the  report  of  a  shareholders'  com- 
mittee of  investigation  into  the  affairs  of  the  Pennsyl- 
vania railroad  in  1874,  the  "sources  of  the  existing  dis- 
trust in  the  value  of  railway  stocks  and  securities"  was 
discussed,  and  the  first  cause  assigned  was  the  "meager 
and  incomplete  reports  made  to  shareholders."  This 
criticism  is  the  more  noteworthy  because  the  report  was 
decidedly  favorable  to  the  administration.-' 

In  the  American  Railroad  Journal  article  above  cited, 
was  submitted  a  tentative  list,  showing  what  the  investor 
might  properly  require  in  a  railroad  report:  "He  wishes 
to  find  in  the  report,  1st,  A  statement  of  the  amount  of 
capital  stock  subscribed.  2nd,  Amount  paid  up,  and 
value  unpaid.  3rd,  Amount  of  debts  and  for  what  pur- 
pose incurred.  4th,  Estimated  and  actual  amount  ex- 
pended, and  for  what  objects;  with  explanations  as  to  the 
cause  of  any  discrepancy  that  may  exist.  5th,  Amount  re- 
quired to  complete  the  road  and  to  make  further  improve- 
ments. 6th,  The  state  and  condition  of  road  and  equip- 
ment. 7th,  Actual  amount  of  receipts  and  expenditures, 
and  for  what  purposes  the  latter  were  made.  8th,  Num- 
ber of  miles  run  by  trains.  9th,  Amount  received  per 
passenger,  and  per  ton  of  freight  carried  each  mile.  We 
give  these  as  items  which  should  always  be  found  in  every 
report,  but  by  no  means  embracing  all  that  should 
appear. ' ' 

Essentials  of  an  Adequate  Report. — The  investor  of  to- 
day demands  much  more  than  this  information;  nothing 
less  than  a  full  and  detailed  statement  which  will  enable 
him  to  ascertain  the  earning  power  of  the  property  in 
which  he  has  or  wishes  to  have  an  interest,  and  so  deter- 
mine the  value  of  the  securities  representing  such  inter- 
est.    He  wishes  also  to  know  of  the  financial  and  physical 

23  Report  of  the  investigating  committee  of  the  Pennsylvania  rail- 
road, 159. 

213 


RAILROAD  FINANCE 

condition  of  the  property  in  order  that  earnings  may  be 
assured  for  the  future.  An  adequate  report  must  contain 
copies  of  the  revenue  account  and  balance  sheet  drawn  off 
from  the  general  books  of  the  company.  If  there  are 
subsidiary  lines  controlled  through  share  ownership, 
separate  revenue  accounts  should  be  given  for  each  com- 
pany. All  items  in  the  accounts  should  be  sustained  by 
detailed  exhibits  sho\^dng  the  nature  and  amount  of  the 
property,  together  with  all  claims  against  it.  This  neces- 
sitates a  full,  detailed  inventory  of  the  physical  property, 
and  a  list  of  securities  owned,  together  with  a  detailed 
statement  of  funded  debt,  with  the  particulars  of  each  issue 
of  bonds  and  its  security.  Leases  and  other  contracts  affect- 
ing tlie  integrity  of  the  property  must  also  be  given.  "With 
this  there  should  be  a  statement  of  the  traffic,  with  informa- 
tion as  to  its  character  and  amount,  and  the  efficiency  with 
which  it  was  handled.  All  statements  in  annual  reports 
must  be  necessarily  accompanied  by  the  figures  of  the  pre- 
ceding year,  for  it  is  not  so  much  the  absolute  amount  of 
any  item  that  is  important  as  the  change  within  the  year. 
The  cause  for  extraordinary  differences  is  usually  stated  in 
the  comment  in  the  report,  but  in  default  of  such  explana- 
tion, the  facts  may  be  ascertained  if  a  sufficiently  elabo- 
rate statement  of  accounts  is  presented.^* 

24  See  Speare,  "Making  a  Railroad  Report,"  Railway  Age  Gazette, 
XLVIII,  395-6. 


CHAPTER  XII 

CAUSES  OF  INSOLVENCY 

Insolvency  Distinguished  from  Bankruptcy. — Insolvency 
is  a  financial  condition.  Bankruptcy  is  a  legal  status. 
Insolvency  is  inability  to  meet  obligations  to  pay  money 
when  it  is  due  upon  demand  for  payment.  This  condi- 
tion, however,  does  not  constitute  bankruptcy.  The  credi- 
tor may  not  enforce  his  right;  he  may  allow  it  to  lie  dor- 
mant for  a  time;  he  may  enter  into  a  new  agreement,  ex- 
tending the  time  for  payment;  or  he  may  permit  the 
debtor  to  settle  by  delivering  something  in  lieu  of  the 
amount  which  is  due.  Bankruptcy  is  the  legal  status  of 
a  debtor  against  whom  action  is  brought  or  threatened  for 
the  enforcement  of  obligations  for  the  payment  of  money, 
when  he  pleads  inability  to  pay  as  his  defense,  and  asks 
that  the  court  effect  a  judicial  settlement  with  his  cred- 
itors. 

Insolvency  Distinguished  from  Deficit. — Nor  is  insol- 
vency to  be  confused  with  the  financial  condition  in  which 
a  person  finds  himself  when  his  liabilities  exceed  his  assets, 
causing  a  deficit.  When  stated  on  a  balance  sheet  the  lia- 
bilities of  an  individual  or  of  a  business  organization  are 
the  classified  and  summarized  amounts  of  obligations  to 
pay  money;  the  assets  are  classified  and  summarized  re- 
sources stated  in  terms  of  the  money  standard.  In  case 
the  amount  of  the  liabilities  exceeds  the  amount  of  the 
assets,  the  difference  constitutes  the  deficit;  if  the  amount 
of  the  assets  thus  stated  exceeds  the  amount  of  the  liabili- 
ties, the  difference  constitutes  the  surplus.  Since  the  con- 
dition of  insolvency  is  determined  by  ability  or  inability 

215 


RAILROAD  FINANCE 

to  meet  obligations  to  pay  a  definite  amount  of  legal  ten- 
der money  when  due,  it  is  obvious  that  a  deficit  may  occur 
without  causing  insolvency,  and  conversely,  that  a  surplus 
may  be  present  in  insolvency.  Furthermore,  there  may  be 
a  deficit  and  a  condition  of  insolvency  without  bankruptcy. 

Credit  Considered  as  a  ''Short  Sale." — A  proceeding  in 
bankruptcy  is  the  legal  remedy  for  insolvency.  It  may  be 
invoked  by  either  creditor  or  debtor;  the  object  being 
settlement  of  all  contracts  for  payment  after  adjudication, 
instead  of  satisfying  each  contract  as  it  matures,  either  by 
payment  or  by  settlement  based  on  a  new  agreement. 
The  immediate  cause  of  every  proceeding  in  bankruptcy  is 
a  credit  contract.  No  better  explanation  may  be  given  of 
the  essential  nature  of  credit  and  of  insolvency  leading  to 
bankruptcy  than  by  applying  the  analogy  of  what  is 
known  on  the  exchanges  as  a  "short  sale."  All  insolven- 
cies are  the  result  of  inability  to  deliver  as  required  by 
contracts  of  credit  or  short  sales  of  money;  all  bank- 
ruptcies are  the  result  of  voluntary  or  enforced  applica- 
tions to  a  court  for  judicial  settlement. 

Right  of  Shareholders  and  of  Bondholders. — Capital, 
considered  as  funds,  property,  and  equipment,  is  obtained 
by  leasehold  agreement  and  by  purchase.  That  which  is 
held  under  leasehold  agreement  requires  that  there  be  no 
obligations  incurred,  except  in  the  form  of  rent  accruals, 
which  may  financially  embarrass  the  corporation  or  its  offi- 
cers; that  which  is  acquired  through  purchase,  is  obtained 
in  exchange  for  the  proceeds  of  sales  of  shares  or  of  credit 
obligations.  The  shareholders  are  the  owners  of  the  corpo- 
ration, and  the  shares  issued  do  not  fall  due;  they  carry 
with  them  no  obligation  to  pay  except  after  dividends 
have  been  declared.  The  purchasers  of  bonds  and  other 
credit  obligations  are  the  only  ones  whose  rights  and  de- 
mands may  produce  a  condition  of  insolvency.  So  long 
as  the  corporation  is  able  to  meet  its  contracts  for  delivery 

216 


CAUSES  OF  INSOLVENCY 

of  money  to  creditors,  the  property  and  the  management 
remains  in  the  control  of  the  directors  and  ofScers,  repre- 
senting the  shareholders  as  proprietors.  When  this  is  im- 
possible, the  property  and  its  management  may  pass  by 
agreement  into  the  control  of  trustees  for  the  creditors  until 
payment  is  made;  or  with  the  consent  of  the  creditors,  it 
may  be  entrusted  to  the  officers  of  the  corporation.  When, 
however,  there  is  resort  to  court,  and  the  insolvent  pleads 
inability  to  meet  obligations  which  are  due,  either  on 
complaint  of  a  creditor  or  on  petition  of  the  officers  of 
the  corporation,  the  court  will  assume  control.  Up  to  the 
point  of  insolvency,  therefore,  responsibility  for  financial 
management  rests  with  officers  elected  by  the  shareholders ; 
during  insolvency  and  before  bankruptcy,  it  may  rest  with 
the  trustees  and  the  bondholders.  After  bankruptcy  the 
court  as  a  public  arbitrator  takes  control  for  the  benefit  of 
all  parties  concerned. 

Fixed  Charges. — This  does  not  mean  that  insolvency  is 
necessarily  the  result  of  mismanagement  by  those  who 
represent  the  proprietary  interest,  or  that  it  reflects  upon 
their  administrative  judgment  and  ability.  For  while  the 
contracts  for  future  delivery  of  money  which  cause  insol- 
vency are  generally  short  time  credit  obligations,  assumed 
as  a  means  of  financing  operation  and  maintenance,  those 
which  are  incurred  as  an  incident  or  result  of  capitaliza- 
tion may  prove  quite  as  serious.  There  are  three  gen- 
eral classes  of  rights  to  demand  money  payments  which 
may  cause  bankruptcy;  those  which  accrue  from  leasehold 
agreements,  those  which  accrue  on  long  time  credit  obliga- 
tions, and  those  which  are  established  by  reason  of  inade- 
quacy of  the  original  capital  of  the  corporation. 

Burdensome  Leases. — Without  any  fault  of  the  manage- 
ment, a  railroad  may  be  encumbered  with  unprofitable 
leases  which  reduce  net  revenues.  Sometimes,  however, 
burdensome  leases  have  been  effected  through  connivance 

217 


RAILROAD  FINANCE 

with  the  officers  of  the  corporation.  Thus  the  Richmond 
and  "West  Point  Terminal  Railway  and  Warehouse  com- 
pany in  1881  entered  upon  a  period  of  expansion,  and 
through  leases  and  purchases  of  shares  involving  contracts 
for  payment  of  rent  and  guarantees  of  interest,  so  in- 
creased fixed  charges  that  revenues  were  inadequate,  and 
in  1891  the  company  collapsed.  The  Wabash,  St.  Louis, 
and  Pacific  failure  in  1889  was  also  due  to  unprofitable 
leases  of  questionable  propriety. 

The  well-known  receivership  case  of  the  Vermont  Cen- 
tral, which  was  before  the  courts  from  1854  to  1884,  re- 
sulted from  a  piratical  lease  made  in  1849.  By  the  terms 
of  this  contract  as  amended  the  following  year,  the  Ver- 
mont Central  leased  the  Vermont  and  Canada  for  fifty 
years  at  a  rental  equal  to  eight  per  cent,  on  the  cost  of  the 
road,  and  as  a  pledge  of  the  rental,  the  Vermont  and 
Canada  took  a  first  lien  upon  the  property  of  the  Vermont 
Central.  At  this  time  there  were  few  railroads  in  New 
England  which  were  earning  enough  to  pay  divi- 
dends of  eight  per  cent.,  and  there  is  contemporary  evi- 
dence to  show  that  there  never  was  any  likelihood  of  such 
returns  from  railroad  operation  in  Vermont.^ 

Heavy  Fixed  Charges. — The  importance  of  considering 
the  amount  and  proportion  of  interest  charges  cannot 
be  overestimated.  The  weight  of  this  burden  may  depend 
upon  either  a  high  rate  of  interest  or  the  amount  of  capi- 
tal obtained  on  credit,  but  in  either  case  the  effect  is  the 
same.  If  a  company  has  a  large  portion  of  its  outstand- 
ing capital  obligations  in  the  form  of  bonds,  it  has  no  way 
to  keep  going  except  by  maintaining  earnings  to  an  extent 
sufficient  to  provide  for  interest.  If  the  capital  is  com- 
posed mainly  of  shares,  however,  the  directors  may  re- 
trench at  will  simply  by  withholding  dividends.     It  is  not 

1  Amer.  Railroad  Jour.,  XXIII,  665;  Vermont,  Report  of  tlie  joint 
special  committee  to  investigate  the  Vermont  Central,  67-70   (1873). 

218 


CAUSES  OF  INSOLVENCY 

surprising,  therefore,  that  bankruptcy  has  been  a  common 
experience  of  those  railroads  which  were  originally 
financed  through  bond  issues  with  the  aid  of  bonuses  in  the 
form  of  shares.  The  Northern  Pacific  at  the  time  of  its 
completion  was  overburdened  with  funded  debt,  and  the 
failure  which  immediately  followed  was  mainly  due  to  this 
top-heavy  condition.  To-day  there  are  fewer  roads  sub- 
ject to  this  danger,  but  this  condition  is  largely  the  result 
of  forced  readjustment.  Large  numbers  of  bonds  have 
been  scaled  down  by  forced  refunding;  others  have  been 
exchanged  for  shares  through  process  of  reorganization ; 
still  others  have  been  refunded  at  maturity  at  lower  rates 
of  interest.  Bankruptcy  has  also  been  the  penalty  of  rail- 
roads which  over-encumbered  their  earnings  through  as- 
sumption of  obligations  represented  by  bonds  issued  after 
the  period  of  construction.  This  does  not  necessarily  mean 
that  overcapitalization  was  the  cause  of  their  embarrass- 
ment, but  it  has  usually  signified  that  there  was  undue 
lack  of  caution  in  determining  the  kind  of  securities  issued 
to  finance  the  purchase  of  terminals  or  the  construction  of 
extensions,  or  to  carry  out  some  other  plan  which  promised 
to  increase  the  earning  capacity  of  the  property. 

Excessive  Mileage. — Whatever  the  fundamental  cause, 
many  situations  have  developed  which  have  been  unfavor- 
able to  successful  management.  Overconstruction,  stimu- 
lated by  absence  of  restraint  upon  the  issue  of  credit 
obligations  and  by  the  opportunity  for  promoters'  profits 
through  the  employment  of  construction-company  methods, 
has  resulted  in  premature  extensions  into  undeveloped 
territory,  as  in  the  case  of  the  Atlantic  and  Pacific  and  the 
Northern  Pacific;  and  the  building  of  lines  into  territory 
where  there  were  already  sufficient  railroads  to  accommo- 
date local  commerce  and  industry,  as  in  the  case  of  the 
New  York  and  New  England,  the  Seaboard  Air  Line,  the 
New   York,  West   Shore,    and   Buffalo,   and   other   roads. 

219 


RAILROAD  FINANCE 

Such  lines  have  been  almost  invariably  constructed  as 
cheapl}'  as  possible,  with  the  idea  of  gradually  bringing 
the  property  up  to  standard  through  the  application  of 
surplus  earnings. 

Faulty  Construction  and  Low  Credit. — But  the  demands 
of  traffic  may  require  the  immediate  acquisition  of  new 
equipment  or  structures  which  were  not  contemplated,  or 
if  contemplated  were  not  provided  for  in  the  original 
capitalization.  This  necessitates  the  raising  of  funds  by 
means  of  additional  loans.  The  inferior  physical  condi- 
tion of  the  property  compels  high  interest  rates,  and  with 
the  first  falling  off  of  traffie  through  general  business  de- 
pression or  crop  failure,  refuge  must  be  sought  in  tem- 
porary extensions  of  time,  and  ultimately  in  resort  to  the 
courts.  Whatever  may  be  the  immediate  cause  of  embar- 
rassment, the  result  must  be  a  readjustment  of  all  rights 
and  claims  to  conform  with  the  exigencies  of  commercial 
and  traffic  conditions.  For,  as  is  pointed  out  by  Doctor  H. 
H.  Swain:  ''A  railroad  once  built  and  equipped  can  almost 
always  be  made  to  earn  something,  and  consequently  few 
railroads  are  ever  abandoned;  the  most  luckless  ventures 
still  remain  to  complicate  the  problem.  The  excessive 
building  of  railroads  has  permanently  lessened  the  earning 
capacitj^  of  railroads  generally.  Foreclosure  and  re- 
organization are  often  only  the  necessary  recognition  of 
this  unpleasant  fact."^ 

Unproductive  Branch  Lines. — Branch  lines  are  often 
.unproductive  for  some  time  after  they  are  built;  and 
many  companies,  themselves  solvent,  have  been  dragged 
down  by  the  weight  of  obligations  to  subsidiary  lines, 
whether  in  the  form  of  advances  or  of  unproductive  leases. 
The  Indianapolis,  Cincinnati,  and  Lafayette  went  into  the 
hands  of  a  receiver  in  1870  because  of  advances  to  unpro- 

2  Swain,  "Economic  Aspects  of  Railway  Receiverships,"  Economic 
Studies,  III,   143. 

220 


CAUSES  OF  INSOLVENCY 

ductive  branches,''  and  the  Kansas  Pacific  became  simi- 
larly embarrassed  in  1873.*  When  in  1893  the  Northern 
Pacific  went  into  receivership,  it  was  found  that  the  com- 
pany had  been  losing  about  $2,000,000  annually  from  the 
operation  of  branch  lines. ^  Another  cause  of  its  distress, 
however,  was  an  unprofitable  lease  of  the  Wisconsin  Cen- 
tral.« 

DisJionest  Practices. — Dishonesty  upon  the  part  of  the 
management  has  been  a  frequent  cause  of  railroad  insol- 
vency. But  while  some  railroads  have  been  so  plundered 
by  construction  companies  that  they  became  insolvent 
almost  as  soon  as  the}^  began  operation,  as  in  the  case  of 
the  New  York  and  Oswego  Midland,  the  Texas  and  Pacific, 
and  the  New  York,  West  Shore,  and  Buffalo,  others  like 
the  Central  Pacific  and  the  Southern  Pacific,  which  ob- 
tained valuable  monopolies  as  a  basis  for  the  capitalization 
of  very  large  construction  profits,  have  never  been  in  the 
custody  of  receivers.  Wrecking  of  completed  railroads 
may  be  carried  out  by  those  in  control  as  a  means  of  ob- 
taining greater  advantages  for  themselves.  Thus  when  in 
1876  the  Ohio  and  Mississippi  was  forced  into  bankruptcy, 
it  was  charged  that  the  Baltimore  and  Ohio  as  the  largest 
shareholder  and  holder  of  the  floating  debt  had  taken  ad- 
vantage of  its  position  to  obtain  the  appointment  of  a 
Baltimore  and  Ohio  official  as  receiver  as  a  part  of  a  plan 
to  absorb  the  property  without  due  regard  to  the  interests 
of  the  first  mortgage  bondholders.''  Again,  the  charge  was 
made  in  1885,  at  the  time  of  the  default  of  the  New  York, 
Chicago,  and  St.  Louis,  that  the  Lake  Shore  had  misman- 
aged the  property  with  a  view  to  the  scaling  of  interest 
charges  through  process  of  reorganization.^     Undoubtedly 

3  Commercial  and  Fmancial  Chronicle,  XI,  594. 

*lhhl.,  XVIII,  271. 

r,Ibid.,  LVII,   854. 

fi/bfrf.,  LVT,   332. 

T  Ibid.,  XXIIJ.  .526,  XX'VI,  392;  Swain,  ut  supra,  84. 

6  Chronicle,  XL,  424,  454. 

221 


RAILROAD  FINANCE 

Gould,  Pisk,  and  their  predecessors  as  the  managers  of  the 
Erie  were  largely  responsible  for  the  recurrent  defaults  of 
that  road.  Excessive  "charter  expenses"  at  the  state  capi- 
tal was  given  as  the  cause  of  the  embarrassment  of  the  La 
Crosse  and  Milwaukee,  after  a  prolonged  contest  for  pos- 
session of  a  congressional  grant  of  land.^ 

Inadequate  Reports. — False  or  inadequate  reports  have 
been  often  employed  to  cover  up  dishonesty  or  incompe- 
tency, and  so  conceal  the  financial  condition  which  must 
end  in  default.  Thus  when  in  1838  the  Missouri,  Kansas, 
and  Texas  defaulted  on  its  first  mortgage  bonds,  an  in- 
vestigation disclosed  the  fact  that  the  property  never  had 
earned  enough  to  pay  fixed  charges,  though  it  had  been  so 
represented  in  the  reports.^"  In  some  instances  the  offi- 
cials of  the  corporation  themselves  were  deceived  by  the 
faulty  system  of  accounts.  A  prominent  cause  of  the 
downfall  of  the  Baltimore  and  Ohio  was  the  discovery 
that  throughout  the  period  from  1858  to  1884,  large  sums 
which  had  been  expended  in  ways  impossible  to  bring  re- 
turns had  been  capitalized  instead  of  deducted  from  earn- 
ings, and  that  much  property  which  had  depreciated  or 
worn  out  had  been  carried  on  the  books  at  cost.  The  effect 
of  these  disclosures  was  to  destroy  the  credit  of  what  had 
been  considered  one  of  the  most  stable  corporations  in  the 
eountry.^^ 

Competition  of  Rates  and  of  Service. — A  natural  result 
of  excessive  construction  and  at  the  same  time  a  favorite 
weapon  of  the  wrecker,  was  rate  cutting.  There  is  no 
doubt  that  the  rate  wars  of  the  early  seventies  contributed 
to  the  causes  of  the  defaults  in  the  depression  following 
the  panic  of  1873.  Even  competition  under  normal  condi- 
tions may  result  disastrously  to  the  less  favored  lines. 
Competition  not  only  reduces  rates  and  divides  traffic,  but 

9  Annual  report,  1868.  lo  Chronicle,  XLVII,  188. 

11  McPherson,  "Working  of  the  Railroads,"  33-5. 

222 


CAUSES  OF  INSOLVENCY 

it  also  creates  a  demand  for  better  facilities  and  service  as 
well.  One  of  the  causes  of  the  Wisconsin  Central  failure 
in  1893  was  the  sharp  rivalry  among  the  six  lines  connect- 
ing Chicago  with  St.  Paul;  and  the  competition  of  the 
Great  Northern  with  its  low  grades  and  the  Canadian  Pa- 
cific with  its  liberal  subsidies  served  to  bring  out  the  weak 
points  in  the  position  of  the  Northern  Pacific  and  to  con- 
tribute toward  its  downfall. 

Hostile  Legislation. — The  influence  of  hostile  legislation 
upon  railroad  solvency  is  a  matter  of  dispute.  The  reason 
given  for  the  default  of  the  IMobile  and  Montgomery  in 
1873  was  low  rates  enforced  by  hostile  legislation/-  and 
the  same  was  said  of  the  failure  of  the  Minneapolis  and 
St.  Louis  in  1888.  But  in  the  latter  case  there  had  been 
a  rate  war,  and  the  company  had  also  suffered  from  the 
heavy  expense  incident  to  operation  in  a  severe  winter.^^ 
Without  debating  the  questi^ji  as  to  how  generally  restric- 
tive legislation  is  the  result  of  the  failure  of  railroad  man- 
agers to  recognize  the  semi-public  nature  of  their  business 
and  to  observe  the  proper  relation  of  the  railroads  to  the 
people,  it  may  be  said  that  while  much  of  it  has  been  un- 
wise, little  of  it  has  been  hostile  in  intent.  In  fact  much 
of  it  has  been  enacted  directly  in  the  interest  of  the  real 
investor.  In  no  case  of  railroad  insolvency  has  it  been 
proven  that  hostile  legislation  was  responsible  for  the  con- 
dition. 

Floating  Debt  the  Immediate  Cause  of  Insolvency. — The 
immediate  or  direct  cause  of  insolvency  is  almost  always 
the  floating  debt,  which  may  be  represented  by  short  time 
notes,  demand  notes,  taxes,  traffic  balances,  unpaid  wages, 
advances  of  interest  money,  bills  for  supplies,  or  other 
forms  of  current  obligation.  Bank  loans  are  ordinarily 
secured  by  the  deposit  of  collateral  representing  control 
of  subsidiary  properties  which  are  essential  parts  of  the 

12  Chronicle,  XVI,  G27.  is  Hid.,  XLVI,  699,  738. 

223 


RAILROAD  FINANCE 

system.  It  is  such  loans  which  precipitate  the  difficulty, 
for  with  a  falling  off  in  earnings,  default  of  interest  on  the 
bonds  will  be  chosen  in  preference  to  sacrifice  of  the  col- 
lateral. When  in  1893  the  Philadelphia  and  Reading  went 
into  the  hands  of  a  receiver,  it  had  collateral  notes  out- 
standing to  the  amount  of  $10,000,000.^*  As  soon  as  a 
company  becomes  short  of  working  capital,  bankers  begin 
to  scrutinize  more  closely  the  collateral  behind  its  notes, 
and  as  the  condition  of  subsidiary  lines  are  likely  to  be 
reflected  in  the  condition  of  the  parent  company,  this  may 
result  in  the  calling  of  demand  loans  or  the  refusal  to 
renew  time  loans.  In  either  event  a  default  upon  the 
fiinded  debt  is  almost  inevitable.  In  1885  the  Buffalo, 
New  York,  and  Philadelphia  obtained  an  extension  on  its 
current  debt  to  allow  time  for  response  to  a  call  upon  the 
shareholders  for  assessments.  With  the  failure  of  this 
measure,  the  road  went  into  the  hands  of  a  receiver.^^ 

Insufficient  Working  Capital. — The  failure  of  a  company 
to  put  out  new  securities  to  represent  capital  expenditures 
has  often  caused  difficulty  in  times  of  disturbance  in  the 
financial  market.  The  New  York,  Lake  Erie,  and  Western 
receivership  of  1884  was  the  result  of  an  attempt  to  finance 
large  additions  to  property  out  of  the  proceeds  of  tem- 
porary loans.^^  But  demands  for  fresh  capital  may  arise 
at  a  time  when  there  is  no  market  for  securities  except 
at  a  ruinous  discount,  to  accept  which  would  be  as  disas- 
trous to  the  financial  position  of  a  company  as  actual  de- 
fault. Under  such  circumstances,  application  is  usually 
made  for  receivers,  that  the  interests  of  all  may  be  con- 
served. 

Effect  of  General  Business  Conditions  on  Railroad  Earn- 
ings.— Among  the  factors  to  be  considered  by  those  charged 
with  railroad  management  is  the  fluctuation  in  earnings 

14  Hid.,  LVI,  464. 

IB  ibid.,  XL,  213,  624.  ie/6»d.,  XXXIX,  349. 

224 


CAUSES  OF  INSOLVENCY 

due  to  changes  in  general  business  conditions.  Examina- 
tion of  the  statistics  of  railroad  earnings  for  a  period  of 
years  will  serve  to  show  the  importance  of  considering  this 
relationship.  It  is  necessary,  therefore,  that  a  railroad 
corporation  be  kept  at  all  times  in  a  condition  to  meet  ma- 
turing credit  obligations,  and  to  this  end  that  its  affairs 
be  conducted  with  direct  reference  to  business  activity  and 
depression.  The  nature  of  the  traffic  carried  by  any  par- 
ticular railroad  wiU  determine  to  a  great  extent  the  pos- 
sible effect  of  a  period  of  financial  distress.  If  it 
be  a  railroad  like  the  Long  Island,  which  serves  a  large 
urban  community,  it  will  have  not  only  a  steady  volume 
of  commutation  traffic  but  also  a  constant  demand  for 
transportation  of  food  products  and  other  varieties  of  traf- 
fic necessary  to  the  residents  of  a  city.  If  it  be  a  rail- 
road like  the  Pennsylvania  which  serves  a  large  territory, 
its  traffic  may  be  so  diversified  that  a  falling  off  in  one 
variety  of  traffic  will  be  made  good  by  an  increase  in  an- 
other. If,  however,  it  be  a  railroad  like  some  of  the 
granger  lines,  which  depend  largely  upon  a  single  indus- 
try for  traffic,  a  crop  failure  or  any  other  unfavorable  in- 
fluence affecting  production  will  cause  an  immediate  loss 
in  earnings.  As  it  is  rarely  possible  to  reduce  operating 
expenses  to  an  extent  sufficient  to  conform  to  decreased 
earnings,  a  business  depression  always  results  in  the  in- 
solvency of  those  railroads  which  have  allowed  themselves 
to  become  burdened  with  an  excessive  weight  of  floating 
debt. 

Inadequacy  of  Early  Reorganizations. — Insolvency  has 
been  not  infrequently  a  recurrent  affliction;  for  in  many 
cases,  particularly  in  the  early  period,  reorganization  was 
effected  too  speedily  to  allow  a  careful  examination  to  be 
made  into  the  causes  of  default,  and  an  application  of 
adequate  measures  of  relief.  The  Atlantic  and  Great 
Western  passed  through  a  period  of  receivership  in  1867 
16  225 


RAILROAD  FINANCE 

and  another  in  1869,  but  it  was  again  in  financial  straits 
in  1874."  The  cause  for  this  has  been  set  fortli  by  a 
careful  student  of  the  subject: 

L 

In  those  failures  which  took  place  before  1S7G.  reorganization 
or  settlement  was  speedily  effected  as  a  rule.  The  trouble  was. 
in  this  case,  that  it  was  done  altogether  too  speedily  to  be  per- 
manently done.  Default  in  interest  on  bonds  being  the  immedi- 
ate  cause  of  embarrassment,  a  settlement  with  bondholders  gave 
the  management  a  free  hand  to  carry  on  the  same  or  similar 
policy  as  before,  without  having  taken  the  trouble  to  go  to  the 
root  of  the  matter  and  get  a  thorough  understanding  of  the  sit- 
uation. It  was  often  impossible  to  do  so  for  want  of  access  to 
information.  Managers  often  avoided  or  failed  to  give  out  de- 
tailed reports  of  the  condition  of  the  property  in  their  control. 
A  settlement  was  patched  up  which  could  hardly  last,  because 
it  was  based  on  a  thoroughly  false  conception  of  the  railroad 
as  an  institution  in  its  relation  to  social  interests.  The  railroad 
had  not  yet  come  to  be  regarded  in  its  twofold  aspect,  both  as 
a  social  institution  required  for  the  community  and  as  a  financial 
corporation  bound  to  discharge  its  obligations  to  the  investor. 
The  role  which  it  was  still  playing  in  many  parts  of  the  counti-y 
was  that  of  an  exploiter  of  the  community  and  creditor  alike 
for  the  benefit  of  an  inside  clique  which  could  not  or  would  not 
be  made  responsible  to  the  stockholders  in  whom  the  title  to 
the  property  lay.  The  stockholders  themselves  had  frequently 
exhausted  their  resources  in  building,  and  had  little  credit  or 
cash  left  to  tide  the  property  over  a  year  of  deficit  in  income. 
Thus  the  management  and  the  bondholders  came  to  control  the 
situation,  in  which  the  two  other  interests  of  the  stockholder 
who  had  reached  his  limit  and  the  community  were  in  danger 
of  being  lost  sight  of.  Under  these  conditions  the  railroads 
which  failed  in  the  early  seventies  were  not  really  reorganized 
— they  were  simply  regalvanized.is 

i7Z6id.,  XIX,  617. 

isCrowell,  "Railway  Eeceiversbips,"  Yale  Rev.,  VII,  326. 


CHAPTER  XIII 

RECEIVERSHIP 

The  Beceiver. — A  receiver  is  an  officer  appointed  by  a 
court,  as  an  impartial  person  to  take  into  custody  prop- 
erty which  is  the  subject  of  litigation,  when  it  does  not 
seem  equitable  that  any  of  the  contending  parties  should 
be  allowed  to  have  control.  The  office  is  that  of  a  minister 
or  agent,  subject  to  the  orders  of  the  court  and  with  little 
or  no  discretionary  power;  and  such  authority  as  is  givea 
must  be  exercised  for  the  benefit  of  all  the  parties  in- 
terested until  it  is  determined  which  one  is  entitled  to 
actual  possession.  The  receiver's  function  is  to  preserve 
the  property  from  waste  or  destruction,  to  collect  the 
revenues  and  proceeds,  and  to  make  final  delivery  accord- 
ing to  the  priorities  or  rights  of  those  whose  claims  have 
been  judicially  approved.  But  while  the  purpose  of  a  re- 
ceivership was  originally  to  close  out  the  affairs  of  a  busi- 
ness or  estate,  with  the  growth  of  corporate  activity,  the 
courts  have  found  it  necessary  to  enlarge  the  powers  of 
receivers  so  as  to  enable  them  to  perform  the  duties  of 
managers,  and  thus  make  possible  the  final  disposition  of 
the  property  as  a  going  concern. 

Bondholders'  Right  to  Possession  and  Sale. — In  the 
mortgage  or  trust  deed  which  is  executed  to  secure  the 
paj^ment  of  an  issue  of  bonds,  title  to  certain  property  is 
conveyed  to  a  trustee  with  power  to  sell  in  the  event  of 
default,  and  to  apply  the  proceeds  to  the  satisfaction  of  the 
debt.  The  time  which  must  elapse  between  a  default  and 
action  on  the  part  of  the  trustees  varies;  it  may  be  sixty 
days  in  one  ease,  and  a  year  or  more  in  another.  The 
number  of  bondholders  who  may  require  the  trustee  to 

227 


RAILROAD  FINANCE 

act  also  varies  from  one-tenth  to  one-half  of  those  repre- 
sented by  him.  IMost  of  the  early  railroad  mortgages  were 
so  defective  technically  as  to  make  them  inoperative.  In 
some  cases  it  was  optional  with  the  trustee  to  assert  his 
rights  after  a  default  had  been  made.  There  was,  there- 
fore, no  way  to  compel  the  trustee  to  begin  foreclosure 
proceedings,  if  for  any  reason  he  did  not  see  fit  to  do  so. 
Others  gave  the  bondholders  the  power  to  act  only  with  the 
consent  and  cooperation  of  the  trustee.  They  were  fur- 
ther defective  in  that  they  failed  to  provide  that  a  default 
in  interest  should  also  carry  with  it  a  default 
in  principal,  and  thus  they  deprived  the  bondholder  of  the 
right  of  forcing  a  sale.  These  defects  were  serious  indeed 
when  it  is  considered  that  trustees  were  often  chosen  from 
among  the  officers  or  directors,  so  that  the  responsibility 
for  enforcing  the  rights  of  bondholders  was  entrusted  to 
those  whose  interests  were  opposed  to  the  assertion  of 
those  rights.  In  such  a  situation,  the  interests  of  the  bond- 
holders were  likely  to  be  prejudiced.  The  trustee  would 
sometimes  neglect  to  enforce  the  payment  of  interest  even 
when  it  had  been  earned ;  or  taking  advantage  of  the  option 
given  him  in  the  mortgage,  he  would  delay  as  long  as  pos- 
sible before  asserting  his  right  to  possession.  In  case  he 
refused  to  foreclose,  the  bondholders  were  frequently 
obliged  to  accept  the  offer  of  the  defaulting  corporation  to 
fund  unpaid  coupons  into  new  securities.  In  some  cases 
too  long  a  time  was  prescribed  before  foreclosure  could  be 
sought  under  the  mortgage. 

Obstacles  in  the  Way  of  Trustees. — But  often  when  the 
trustee  was  able  and  willing  to  act,  various  causes  were  op- 
erative to  defer  foreclosures  or  to  make  such  a  sale  either 
inadvisable  or  impossible.  Many  of  the  railroads  which 
failed  in  this  early  period  could  not  be  foreclosed  because 
their  bonds  bore  the  endorsement  of  a  state,  which  conse- 
quently held  a  first  lien  upon  the  property.     As  a  state 

228 


RECEIVERSHIP 

could  have  little  desire  to  make  the  sacrifice  attending  a 
forced  sale,  the  holders  of  junior  mortgages  were  without 
means  of  redress  except  after  much  delay  and  loss.  When 
in  1873  a  foreclosure  sale  of  the  Jacksonville,  Pensacola, 
and  Mobile  was  advertised,  the  attorney-general  of  Florida 
took  action  under  the  state  lien  and  delayed  the  sale  for 
six  years.^  The  state  of  Georgia  in  the  same  manner  held 
up  the  sale  of  the  Macon  and  Brunswick  from  1873  to 
1880.2 

Public  Policy  Against  Segregation  of  Properties. — An- 
other factor  which  tended  to  delay  foreclosure  was  the 
poor  physical  condition  of  insolvent  roads,  which  necessi- 
tated extensive  repairs  and  replacements  before  the  prop- 
erty could  be  brought  up  to  a  standard  at  which  profit- 
able operation  would  be  possible.  Again,  as  railroad  sys- 
tems were  gradually  built  up  through  the  consolidation  of 
separate  properties,  they  became  too  large  to  sell  to  any 
outside  purchaser ;  and  to  allow  a  system  to  be  dismem- 
bered is  to  decrease  its  earning  capacity  and  so  lower  the 
price  at  which  it  may  be  sold.  Moreover,  as  these  sepa- 
rate properties  bore  different  mortgages,  each  with  its 
trustee,  it  was  found  impossible  for  a  trustee  to  act  with- 
out injury  to  the  security  of  the  bonds  which  he  repre- 
sented. It  became  apparent,  therefore,  in  repeated  in- 
stances that  there  was  need  for  a  disinterested  official  to 
operate  railroads  in  default  that  the  public  might  receive 
uninterrupted  service,  and  that  the  bondholders  might  be 
protected  in  their  rights.  In  some  instances  the  mortgage 
trustee  was  the  most  eligible  candidate  for  this  position  of 
manager.  Thus  when  in  1852  the  Vermont  Central  be- 
came embarrassed,  the  directors  surrendered  the  property 
to  the  trustee  of  the  first  mortgage  bonds,  who  operated  it 
for  three   years.^     The   Hartford,   Providence,   and   Pish- 


1  Commercial  and  Financial  Chronicle,  XVII,  155,  XXVIII,  599. 

2  Ibid.,  XVII,  53,  XXX,  248.  »  Annual  report,  1855. 

229 


RAILROAD  FINANCE 

kill  was  operated  by  the  mortgage  trustees  for  about 
twenty  years  prior  to  1878,*  and  the  trustees  under  the 
several  mortgages  of  the  St.  Vincent  extension  of  the  St. 
Paul  and  Pacific  took  possession  in  1876,  and  operated  the 
road  until  it  was  foreclosed  three  years  later.^ 

Limitations  of  Trustee  as  to  Management  and  Sale. — In 
case  it  was  possible  for  a  trustee  to  manage  a  property  in 
default  so  successfully  as  to  satisfy  the  claims  of  the  bond- 
holders out  of  the  earnings  from  operation,  he  could  not 
retain  control,  but  must  surrender  possession  to  the  for- 
mer management,  however  incompetent.  Moreover,  it 
was  early  discovered  that  the  rights  of  bondholders  could 
not  be  enforced  according  to  the  wording  of  the  mortgage, 
and  that  there  were  practical  obstacles  in  the  way  of  a 
sale.  In  but  few  instances  have  the  bondholders  succeeded 
in  getting  possession  of  an  important  railroad.  In  many 
instances,  on  the  other  hand,  they  have  had  not  only  to 
fund  their  coupons,  but  to  submit  to  a  reduction  of  princi- 
pal or  interest,  to  submit  to  the  prior  payment  or  funding 
of  floating  debt,  and  even  to  pay  a  cash  assessment  to  make 
possible  the  restoration  of  the  property  to  proper  physi- 
cal condition  while  the  shareholders  have  remained  in  full 
control.  This  discrepancy  between  legal  theory  and  prac- 
tice may  be  accounted  for  to  some  extent  by  the  manner 
in  which  trustees  were  appointed,  but  more  by  the  fact 
that  the  security  of  any  particular  issue  of  bonds  was  in- 
definite because  of  the  large  number  of  separate  issues. 
The  necessary  result  was  agreement  to  an  arrangement 
which  would  require  the  waiving  of  particular  rights  for 
the  benefit  of  common  interests,  in  order  that  there  might 
be  no  serious  injury  to  the  earning  power  which  deter- 
mined the  value  of  the  bonds. 

Complexity  of  Interests  in  the  Property. — The  com- 
plexity of  interests  in  railroad  propertj^  has  also  tended  to 

-»  Chronicle,  XXII,  304 ;    Bayles,  Providence,  I,  282. 
f>  Chronicle,  XXIII,  379;  XXVIII,  495. 

230 


RECEIVERSHIP 

make  difficult  the  literal  enforcement  of  the  terms  of  a 
mortgage.  There  may  be  bonds  secured  by  a  lien  upon  a 
particular  portion  of  the  road,  and  others  secured  by  a  lien 
upon  the  entire  system  including  the  securities  of  eon- 
trolled  companies.  There  may  be  bonds  secured  by  liens 
upon  separate  parcels  of  property.  All  these  varieties  of 
bonds  depend  for  their  value  upon  the  uninterrupted 
operation  of  the  sj'stem  as  a  whole;  yet  notwithstanding 
this  obvious  fact,  each  mortgage  states  specifically  the 
separate  lien  of  its  bonds  upon  some  particular  piece  of 
property,  or  what  is  but  little  better,  its  claim  upon  the 
entire  property  subordinate  to  the  various  mortgages 
which  may  precede  it.  In  other  words,  the  mortgage  as- 
serts that  it  has  a  lien  on  a  piece  of  property.  The  value 
of  that  security  depends  upon  the  revenue  to  be  obtained 
from  it.  But  this  revenue  depends  upon  the  position  of 
this  piece  of  property  as  an  integral  part  of  a  large  rail- 
road system,  upon  the  other  parts  of  which  the  holders  of 
the  bonds  in  question  have  no  claim  whatever. 

Earning  Power  the  Real  Security. — The  real  security  of 
a  railroad  bond  is  not  stated  in  the  mortgage.  Under  these 
circumstances,  even  if  his  interest  be  in  default,  the 
holder  of  such  a  bond  may  not  foreclose  without  heavy 
loss,  because  the  act  of  foreclosure  would  seriously  impair 
the  value  of  the  property  concerned  by  taking  it  out  of 
connection  with  the  general  system.  Nor,  on  the  other 
hand,  is  the  holder  of  a  general  or  "blanket"  mortgage 
bond  in  a  better  position.  His  lien  is  usually  subordinate 
to  first  mortgages  on  particular  portions  of  the  line,  and 
these  must  be  paid  off  before  he  can  come  into  possession. 
To  raise  an  amount  of  cash  sufficient  to  pay  all  the  prior 
claims  upon  the  different  portions  of  a  railroad  system  is 
a  task  which  is  almost  impossible  and  rarely  attempted. 

Position  of  Shareholders. — Shareholders  may  oppose 
foreclosure  sales  on  the  ground  that  their  rights  would  be 

231 


RAILROAD  FINANCE 

seriously  injured,  as  indeed  they  would  if  a  sale  were 
forced  at  a  time  when  no  one  were  willing  to  purchase. 
They  may  advance  the  claim  that  the  selling  price  of  the 
road  at  a  time  when  it  is  in  serious  difficulties,  and  per- 
haps also  when  general  financial  stringency  has  de- 
pressed the  value  of  all  property,  is  no  fair  criterion  of  its 
value  under  normal  conditions.  They  may  present  evi- 
dence, also,  tending  to  prove  that  under  more  favorable 
circumstances  the  earnings  of  the  road  would  be  more  than 
sufficient  to  pay  interest,  and  that  their  shares,  which 
would  be  entirely  wiped  out  by  foreclosure  sale,  are  in 
reality  a  claim  to  potential  earnings  and  in  equity  entitled 
to  consideration. 

The  Public  Interest. — The  interest  of  the  public  is  also 
opposed  to  the  assertion  of  the  express  terms  of  a  railroad 
mortgage  when  this  would  result  in  the  dismemberment 
of  systems  with  the  consequent  disturbance  of  shippers, 
and  in  such  an  event  the  courts  will  be  quick  to  act  to 
prevent  strict  enforcement.  Yet  the  rights  of  bondholders 
may  be  said  to  be  protected  as  much  as  possible,  though  it 
is  only  in  rare  instances  that  a  railroad  has  been  sold  at 
foreclosure  for  the  benefit  of  its  creditors.  Some  basis  of 
settlement  is  usually  found,  and  pending  adjustment  the 
property  subject  to  default  is  placed  in  the  control  of  a 
receiver. 

Receivership  a  Necessary  Expedient. — During  the  early 
period,  extending  from  the  fifties  to  about  1880,  many  in- 
solvent railroads  were  put  in  charge  of  receivers,  but  it 
was  not  until  the  late  seventies  that  receivership  had  de- 
veloped into  something  entirely  distinct  from  trusteeship. 
It  was  then  that  the  need  became  apparent  for  a  form  of 
administration  adequate  to  satisfy  the  conflicting  claims  to 
railroad  property  in  default.  So  long  as  mortgagees  were 
compelled  to  rely  upon  trustees  for  the  enforcement  of  their 
rights,  and  so  long  as  the  instrument  itself  was  technically 

232 


RECEIVERSHIP 

defective,  railroad  managers  might  default  at  will  upon  in- 
terest payments,  relying  upon  their  ability  to  make  some 
sort  of  agreement  with  the  secured  creditors  which  would 
leave  them  in  control.  Even  when  it  was  possible  to  ob- 
tain the  consent  of  bondholders  to  fund  unpaid  coupons, 
the  arrangement  had  the  effect  of  adding  to  fixed  charges, 
and  a  recurrence  of  insolvency  usually  followed.  The  At- 
lantic and  Pacific  in  1873  succeeded  in  funding  the  cou- 
pons w^hich  were  to  fall  due  within  the  next  two  years 
upon  all  except  its  first  mortgage  bonds,  but  subsequent 
insolvency  led  to  the  appointment  of  a  receiver  in  1875,  as 
the  only  means  of  meeting  the  situation.^  Trusteeship 
failed,  and  in  its  stead  came  receivership,  the  rise  of  which 
in  the  words  of  Doctor  John  F.  Crowell,  "is  the  history 
of  the  evolution  of  responsible  management  in  an  entirely 
new  species  of  corporate  enterprise,  involving  a  unique 
complex  of  interests  individual  and  social."^ 

Conflicting  Interests. — It  is  a  principle  of  equity  that  a 
receiver  will  not  be  appointed  in  cases  where  there  is  an 
adequate  remedy  at  law  for  all  contending  parties;  but 
the  great  number  of  conflicting  interests  in  railroad  prop- 
erties so  complicates  the  situation  that  a  receiver  is 
usually  named  with  little  hesitation  when  it  appears  to  the 
court  that  a  default  is  imminent.  The  public  has  interests 
which  must  be  respected.  Aside  from  the  matter  of  unin- 
terrupted operation,  and  considerations  of  safety  and  con- 
venience, through  states  or  municipalities  the  public  has 
often  had  important  financial  interests  in  railroads  as  guar- 
antor of  bonds,  secured  creditor,  or  shareholder.  The  in- 
terests of  individuals  are  even  more  varied.  As  a  share- 
holder one  may  have  an  ordinary  or  a  preferential  interest 
in  proprietorship,  with  definite  liabilities  in  the  event  of  de- 
fault, and  corresponding  rights  to  the  proceeds  of  the  cor- 

6/6uZ.,  XVTTT,  7;  XXT.  440;  XXIII,  278. 

7  Crowell,  "Kailway  Receiverships,"  Yale  Rev.,  VII,  330. 

233 


RAILROAD  FINANCE 

porate  estate;  or  one  may  have  such  interests  in  a  subsid- 
iary company,  the  shares  of  which  may  or  may  not  be 
guaranteed  as  to  dividends  by  the  controlling  corporation. 
The  variety  of  credit  claims  upon  railroad  property  is  ex- 
tensive. There  are  the  general  mortgage  bonds,  secured 
by  a  first,  second,  or  third  lien  upon  the  entire  property; 
divisional  bonds,  extension  bonds,  and  branch  line  bonds, 
whether  guaranteed  or  not;  bonds  secured  upon  separate 
parcels  of  property'',  as  bridges,  terminals,  equipment,  and 
real  estate;  income  bonds;  and  collateral  trust  bonds  se- 
cured upon  shares  which  represent  control  of  subsidiary 
lines.  Other  individual  credit  claims  are  represented  by 
short  term  notes,  usually  secured  upon  collateral ;  bills  for 
material  and  supplies ;  unpaid  wages ;  judgment  claims  for 
loss,  breach  of  contract,  injury,  or  damage;  and  un- 
adjusted claims.  Other  railroads  are  also  concerned,  either 
as  guarantors,  holders  of  securities,  or  claimants  for  traffic 
balances  and  rentals. 

Solvent  Receivership. — Companies  which  were  perfectly 
solvent  have  sometimes  petitioned  for  the  appointment  of 
receivers  in  order  that  they  might  be  relieved  from  embar- 
rassing agreements.  The  Indianapolis,  Bloomington,  and 
Western  was  placed  in  the  hands  of  a  receiver  in  1886,  in 
order  that  a  dispute  over  the  terms  of  its  lease  of  the  Cin- 
cinnati, Sandusky,  and  Cleveland  might  be  judicially  set- 
tled.^ The  St.  Louis,  Vandalia,  and  Terre  Haute  was  com- 
mitted to  the  custody  of  the  court  in  1902,  in  order  that  an 
end  might  be  put  to  the  controversy  between  the  minority 
shareholders  and  the  Terre  Haute  and  Indianapolis,  repre- 
senting the  Pennsylvania  company,  over  the  matter  of  dis- 
tribution of  earnings.^ 

Application  for  a  Receiver. — It  was  once  the  practice  to 
appoint  receivers  in  response  to  applications  of  certain 
creditors,  who  represented  that  such  action  was  necessary 

•  Chronicle,  XLIII,  23,  515.  ^  Railway  Age,  XXXIV,  330. 

234 


RECEIVERSHIP 

to  preserve  the  integrity  of  the  property.  Such  applica- 
tions were  usually  opposed  in  the  court  by  the  managers, 
and  there  v/as  opportunity  to  learn  all  the  essential  facta 
in  a  case.  But  in  1884  the  Wabash,  St.  Louis,  and  Pacific 
railway  itself  applied  for  a  receiver  on  the  ground  that 
the  protection  of  the  court  was  necessary  to  prevent  the 
holders  of  the  separate  mortgages  from  dismembering  the 
system,  which  was  made  up  of  fifty-eight  original  com' 
panies,  aggregating  3600  miles,  and  extending  into  six  dif- 
ferent states.  The  mortgages  numbered  thirty-eight. 
Some  of  them  covered  the  property  of  constituent  com- 
panies; others  applied  to  separate  divisions;  and  over  all 
was  one  general  mortgage.^*^  No  notice  of  this  application 
was  given  to  any  of  the  bondholders,  or  to  any  of  the 
representatives  of  the  creditors,  except  the  trustees  of  the 
general  mortgage.  Receivers  were  appointed,  however,^^ 
and  the  action  was  upheld  by  the  court.  This  inaug- 
urated an  era  of  "friendly"  receiverships;  for  since 
that  time  it  has  become  the  general  practice  for  a  railroad 
in  danger  of  default  to  file  an  application  on  its  own  be- 
half and  secure  the  appointment  of  a  receiver  of  its  own 
choosing,  thus  preventing  the  creditors  from  pressing  suits 
for  foreclosure  under  the  terms  of  their  mortgage.^'' 
President  Huntington  of  the  Chesapeake  and  Ohio  ob- 
tained the  appointment  of  a  receiver  for  that  company  in 
1887,  upon  representation  that  while  no  default  had  been 
made,  the  railroad  was  indebted  to  him  to  the  amount  of 
$1,765,000.  This  was  on  account  of  loans  to  provide  for 
expenditures  which  should  have  been  paid  out  of  current 
earnings.^^     The     Atchison     receivership     in     1894     was 

10  Chronicle,  XXXVIII,  639. 

11  Wabash,  St.  Louis,  and  Pacific  v.  Central  Trust  Co.,  22  Fed. 
Rep.,  272. 

12  Chamberlain,     "New-fashioned     Receiverships,"    Harvard    Law 
Rev.,  X,  139-49. 

IS  Chronicle,  XLV,  572. 

235 


RAILROAD  FINANCE 

brought  about  by  application  of  the  directors,  and  the  ap- 
pointment was  obtained  with  secrecy  and  despatch.^* 

But  early  in  1884,  before  the  Wabash  receivership,  the 
president  of  the  New  York  and  New  England  declared 
that  attachments  were  liable  to  be  put  on  the  property, 
and  at  two  o'clock  in  the  morning,  the  directors  obtained 
the  appointment  of  the  president  as  temporary  receiver, 
petition  for  such  action  being  entered  by  an  English  bond- 
holder.^^ Bondholders  and  shareholders  may  join  in  the 
application,  as  in  1895  when  the  Norfolk  and  Western 
made  a  statement  of  financial  condition,  and  the  bond- 
holders in  anticipation  of  a  default,  sued  for  the  appoint- 
ment of  a  receiver.  The  directors  admitted  the  truth  of 
the  charges,  and  joined  in  the  petition,  which  was 
granted.^® 

Secret  Application. — In  this  manner  the  arrangements 
are  all  made  in  advance ;  and  if  the  directors  do  not  choose 
to  make  application  themselves,  some  creditor  may  be 
easily  found  who  will  allege  that  the  company  is  liable  to 
default.  Upon  confession  of  the  truth  of  the  charge  by 
the  officers  of  the  company,  the  court  will  take  the  prop- 
erty into  its  control.  Instances  have  been  frequent  where 
creditors  have  obtained  the  appointment  of  receivers  by 
means  of  a  secret  application.  Thus  the  Grand  Trunk 
railway  in  1896  threw  the  Central  Vermont  into  receiver- 
ship upon  the  plea  that  it  was  a  large  holder  of  floating 
debt,  and  that  if  other  creditors  should  press  for  payment, 
the  Central  Vermont  would  be  dismembered  and  unable 
to  pay.  This  action  was  a  surprise  to  the  officials  of  the 
Central  Vermont,  even  the  president,  who  was  named  as 
one  of  the  receivers." 

Application  hy  Public  Officials  Proposed. — Following 
the  principles  governing  the  appointment  of  receivers,  it 

i4/6id,  LVIII,  42.  i6/6id.,  LX,  259. 

16  lUd.,  XXXVIII,  30.  "  Ihid.,  LXII,  588,  634. 

236 


RECEIVERSHIP 

would  seem  that  the  public,  through  some  proper  official, 
might  be  allowed  to  ask  the  court  to  appoint  a  receiver, 
particularly  in  cases  where  the  action  or  inaction  of  cred- 
itors or  the  management  threatens  to  interfere  with  service. 
In  the  case  of  protracted  labor  controversy,  for  example, 
when  the  contending  parties  are  unable  to  come  to  an 
agreement,  resort  to  a  court  by  a  public  official  would  insure 
the  public  interest  in  its  right  to  safe  and  uninterrupted 
service. 

Qualifications  for  a  Receiver. — It  was  once  an  established 
principle  that  to  be  eligible  as  a  candidate  for  receiver,  one 
must  have  had  no  connection  with  the  defaulting  enter- 
prise in  an  official  capacity ;  for  a  receiver  should  be  a  dis- 
interested person.  But  in  the  case  of  railroads  this  rule 
has  been  rarely  observed,  particularly  since  the  Wabash 
decision,  when  a  former  president  of  the  corporation  and 
one  of  the  directors  was  appointed  receiver.  The  ajffairs 
of  a  railroad  are  so  involved  in  technicalities  that  a  re- 
ceiver must  have  been  trained  in  the  railroad  service,  and 
the  relations  of  each  system  are  so  complicated  that  the 
range  of  choice  is  often  limited  to  officials  who  have  been 
connected  with  the  old  management.  Usually  such  officials 
are  also  heavily  interested  financially.  This  has  afforded 
opportunities  for  grave  abuse,  because  if  there  has  been 
mismanagement,  the  friendly  receiver  may  not  be  disposed 
to  disclose  the  source  of  difficulty  and  aid  in  the  work  of 
reorganization.  To  avoid  this  danger  two  receivers  are 
often  appointed ;  and  while  one  is  chosen  from  among  those 
technically  familiar  with  the  management  of  the  property, 
the  other  is  a  representative  of  important  outside  interests. 
This  makes  a  working  arrangement  possible,  and  keeps 
down  hostile  criticism,  thus  leading  to  reorganization  in 
the  shortest  possible  time.  If  the  parties  to  an  applica- 
tion agree  upon  a  candidate,  the  court  will  generally  ap- 
point him  in  the  absence  of  evidence  that  he  is  in  any 

237 


RAILROAD  FINANCE 

way  responsible  for  the  embarrassment  which  makes  the 
receivership  necessary.  Similarly,  the  court  will  remove 
a  receiver  upon  evidence  that  his  affiliations  are  such  as  to 
unfit  him  for  disinterested  service.  Thus  the  bondholders 
of  the  Leavenworth,  Lawrence,  and  Gulf  in  1875  pro- 
tested against  the  appointment  of  a  representative  of  the 
competitive  Missouri  River,  Fort  Scott,  and  Gulf.^^ 

Jurisdiction  of  Receivers. — In  cases  where  a  railroad  ex- 
tends through  several  states,  the  appointment  of  the 
principal  receiver  may  be  sought  in  the  state  in  which  it 
has  its  principal  office,  and  ancillary  or  auxiliary  suits 
must  then  be  entered  in  each  of  the  other  cities.  Ordi- 
narily, the  same  receivers  will  be  named  in  these  states  as 
a  matter  of  comity.  Application  is  usually  made,  how- 
ever, not  to  a  state  court  but  to  a  United  States  court; 
but  here  the  same  rule  applies  in  cases  where  the 
line  extends  beyond  the  jurisdiction  of  a  single  court.  The 
court  which  first  obtains  jurisdiction  retains  it  in  all  mat- 
ters concerning  the  management  of  the  whole  property, 
as  was  originally  held  in  a  case  concerning  the  Fort 
Wayne,  Muncie,  and  Cincinnati  railroad.  Receivers  for 
this  road  were  appointed  by  an  Indiana  court  in  1874,  but 
upon  application  of  the  bondholders,  the  United  States  cir- 
cuit court  removed  them.  It  was  finally  decided  that  the 
state  court  having  first  taken  cognizance  of  the  contro- 
versy was  entitled  to  retain  jurisdiction,  and  this  rule  has 
been  generally  approved.^®  But  in  another  case  which 
arose  the  same  year,  a  federal  court  appointed  a  receiver 
for  the  Burlington  and  Southwestern,  and  instructed  him 
to  demand  possession  from  the  receiver  who  was  already 
in  control  by  virtue  of  the  appointment  of  an  Iowa  court. 
A  compromise  was  finally  effected,  by  which  both  receivers 

i8  76tU,  XX,  41. 

18  Gaylord  v.  Fort  Worth,  Muncie,  and  Cincinnati  Railroad,  6  BIb- 
sell   (U.  S.),  286. 

238 


RECEIVERSPriP 

resigned  in  favor  of  a  representative  of  the  bondholders 
named  by  the  federal  eourt.^°  This  rule  was  also  chal- 
lenged in  1895,  in  connection  with  the  receivership  of  the 
Northern  Pacific.  This  line  runs  through  the  seventh, 
eighth,  and  ninth  United  States  judicial  districts,  and  the 
judge  in  the  ninth  district  refused  to  recognize  the  court 
for  the  seventh  district  as  the  court  of  primary  jurisdic- 
tion, notwithstanding  that  the  original  suit  had  been  en- 
tered there.  Four  justices  of  the  United  States  supreme 
court,  acting  as  justices  assigned  to  the  several  districts, 
upheld  the  principle  that  the  court  which  first  takes  juris- 
diction should  be  recognized  as  the  one  having  primary 
authority.^^ 

Financial  and  Administrative  Aspects  of  Receivership. — 
It  is  the  primary  function  of  the  receiver  to  operate  the 
railroad  under  his  control,  subject  to  the  orders  of  the 
court,  until  the  affairs  of  the  corporation  are  settled. 
Operation  of  a  bankrupt  railroad,  however,  is  a  compre- 
hensive term,  covering  almost  any  expenditure  which  will 
maintain  or  increase  earning  power.  Upon  coming  into 
control,  a  receiver  usually  finds  the  property  in  a  dilapi- 
dated condition,  on  account  of  the  attempt  of  the  former 
managers  to  retrench  and  thus  avert  default  or  to  pay  un- 
earned dividends  to  keep  up  the  market  for  securities. 
The  rails  are  badly  worn,  the  ties  in  need  of  replacement, 
and  the  rolling  stock  and  structures  require  extensive  re- 
pairs. In  some  cases  the  condition  of  the  tracks  and  struc- 
tures has  been  such  as  to  render  operation  dangerous.  In 
1893  the  Michigan  commissioner  of  railroads  found  that 
the  line  of  the  Toledo,  Ann  Arbor,  and  North  Michigan 
was  a  source  of  public  danger,  and  ordered  the  speed  of 
passenger  trains  reduced.^^    The  receiver  must  be  not  only 

zo  Chronicle,  XIX,  397,  477;   xxi,  441. 

21  Ibid.,  LXI,  532,  558,   1065;   LXII,  233. 

22  Ann  Arbor  Railroad,  Annual  report,  1898. 

239 


RAILROAD  FINANCE 

an  operator,  but  he  must  also  be  able  to  restore  the  work- 
ing efficiency  of  the  property.  In  the  Atchison  receiver- 
ship of  1893-5  the  receivers  had  charge  of  the  operation  of 
a  system  of  4500  miles,  with  indirect  control  of  about  2000 
miles  of  subsidiary  lines.  During  this  period  the  rolling 
stock  was  overhauled  and  repaired,  large  numbers  of  rails 
and  ties  were  replaced,  and  generous  expenditures  were 
made  for  the  filling  in  of  trestles  and  the  reduction  of  the 
mileage  of  wooden  bridges.^^ 

In  some  instances  receivers  have  been  empowered  to  un- 
dertake the  construction  of  additional  mileage,  either  to 
complete  work  which  was  interrupted  by  the  default,  or  to 
form  some  advantageous  connection.  Usually,  however,  the 
number  of  miles  constructed  has  not  been  over  ten  or  fif- 
teen. But  in  1873  the  receivers  of  the  St.  Vincent  extension 
of  the  St.  Paul  and  Pacific  were  authorized  to  complete  un- 
finished portions  of  the  road  in  order  that  a  valuable  land 
grant  might  not  be  allowed  to  lapse.^*  By  a  sec'ond  order 
in  1878  they  were  instructed  to  extend  the  main  line  sixty- 
five  miles,  and  to  build  eighty  miles  of  branch  lines.^^ 
Over  thirty  miles  of  the  Columbia,  Piqua,  and  Indiana 
railroad  were  built  by  the  receiver  in  1858-9 ;  -^  and  several 
short  extensions,  aggregating  seventy-three  miles,  were 
built  by  the  receivers  of  the  Missouri,  Kansas,  and  Texas 
in  1888-91." 

While  a  receiver  may  make  contracts  in  matters  involv- 
ing small  outlays,  a  special  order  of  the  court  is  required 
to  give  validity  to  agreements  of  a  permanent  nature. 
"With  such  authority  the  receivers  of  the  Missouri,  Kan- 
sas, and  Texas  in  1869  leased  a  line  125  miles  in  length 

23  Report  of  Walker  and  McCook,  receivers,  1896. 
2*  Chronicle,  XVII,  380. 
25ihid.,  XXVI,  575. 
26  Amer.  Railroad  Jour.,  XVI,  555. 

■■iT  Railway  Rev.,  XXXI,  375;  Chronicle,  XLI,  272;  XLVII,  594; 
XLIX,  22;  L,  690. 

240 


RECEIVERSHIP 

from  the  Kansas  City  and  Pacifie."*  But  a  receiver  is  not 
bound  to  continue  a  contract  entered  into  before  his  ap- 
pointment, if  to  do  so  would  divert  the  earnings  from  the 
purposes  for  which  the  receivership  was  created.  The 
Central  Vermont  receivers  in  1896  defaulted  on  the  rental 
due  under  the  lease  of  the  Rutland  railroad,  but  they 
continued  the  payments  bn  the  New  London  North- 
ern, because  the  lease  of  that  road  had  been  profit- 
able.^" This  also  applies  to  car  trust  agreements;  but 
in  practice  the  receivers  always  find  it  to  the  advantage 
of  the  property  to  use  the  rolling  stock  held  subject  to 
such  contracts.^" 

Interest  Payments. — "Where  a  receiver  is  appointed  be- 
cause of  a  default  upon  a  junior  mortgage,  interest  pay- 
ments will  be  continued  under  the  receivership  at  the  dis- 
cretion of  the  court.  The  Ohio  and  Mississippi,  when 
already  in  the  hands  of  a  receiver,  defaulted  upon  its  first 
mortgage  bonds  in  1877.  The  court  thereupon  authorized 
the  receiver  to  pay  the  interest  upon  those  bonds,  and  thus 
prevent  foreclosure.^^  The  receiver  of  the  Kentucky  Cen- 
tral was  in  1886  given  leave  to  pay  the  interest  upon  the 
bonds  of  its  proprietary  line,  the  Maysville  and  Lexing- 
ton.^- 

Payment  of  Back  Claims. — Railroads  when  coming  into 
the  control  of  the  court  are  usually  heavily  indebted  for 
wages,  materials  and  supplies,  and  balances  on  interline 
traffic,  because  managers  in  the  face  of  declining  revenues 
will  defer  the  payment  of  operating  expenses  in  the  hope 
that  a  period  of  embarrassment  may  thus  be  tided  over 
and  a  default  avoided.  The  Wabash,  St.  Louis,  and  Pa- 
cific had  $2,000,000  of  such  claims  outstanding  in  1884," 

28  Chronicle,  XLIX,  22.  29  Ibid.,  LXIII,  754. 

30  Rawie,  "Car  Trust  Securities,"  Amer.  Bar  Assoc,  Report,  VIII, 
36-44. 

31  Chronicle,  XXV,  17,  187,  237, 

32  Ibid.,  XLIII,  634.  33  Ibid,  XXXVIII,  707. 

17  241 


RAILROAD  FINANCE 

and  the  Norfolk  and  Western  in  1895  had  $350,000  due 
in  wages  alone.^*  It  is  customary  for  the  court  in  ap- 
pointing a  receiver  to  order  the  payment  of  back  claims  of 
this  character,  which  have  been  incurred  within  a  reason- 
able time,  usually  six  months.  This  allows  unsecured 
creditors  a  prior  right  to  the  earnings  during  the  period 
of  receivership,  and  even  to  the  fund  received  from  fore- 
closure of  the  property  itself;  but  the  practice  is  justified 
upon  the  ground  that  the  debts  should  have  been  paid  out 
of  current  earnings  at  the  time  they  were  incurred,  and 
that  their  payment  by  order  of  the  court  is  nothing  more 
than  a  restoration  of  diverted  funds.^^ 

Reduction  in  Wages. — As  a  receiver  is  an  officer  of  the 
court,  interference  with  his  official  acts  is  held  to  be  con- 
tempt of  court.  Hence  when  an  attempt  is  made  to  in- 
troduce economies  through  a  reduction  of  wages,  the  court 
will  if  necessary  enjoin  employees  from  striking.  In  1893 
the  Northern  Pacific  receivers  made  a  cut  in  wages  of  from 
five  to  ten  per  cent.  Upon  remonstrance  by  the  employees, 
the  receivers  obtained  an  order  from  the  court  directing 
them  to  put  the  reduced  schedule  into  effect,  and  enjoin- 
ing the  employees  from  combining  to  quit  without  notice. 
This  action  was  based  upon  the  ground  that  a  strike  would 
paralyze  the  business  of  the  territory  served  by  the  road, 
and  cause  general  suffering  through  the  cutting  off  of 
necessary  supplies  in  the  middle  of  winter.'^  This  order 
was  modified  somewhat  upon  appeal,^^  and  never  finally 
passed  upon  by  the  supreme  court;  but  it  serves  to  em- 

3*  Ibid.,  LX,  259. 

35  Metcalfe,  "Priority  Over  Mortgage  of  Debts  Contracted  by  Rail- 
roads Before  Receivership,"  Central  Law  Jour.,  XXXIX,  241-4;  Bis- 
pham,  "Rights  of  Material  Men  and  Employees  of  Railroad  Com- 
panies as  Against  Mortgagees,"  Amer.  Bar  Assoc,  Report,  III,  167- 
85. 

36  Farmers'  Loan  and  Trust  Co.  v.  Northern  Pacific,  60  Fed.  Rep., 
803. 

37  Arthur  vs.  Oakes,  63  Fed,  Rep.,  310. 

242 


RECEmERSHIP 

phasize  the  power  which  a  court  of  equity  may  use  to 
carry  out  the  purpose  of  receivership.^^ 

Methods  of  Raising  Money. — Money  for  repairs  and  im- 
provements mny  be  obtained  either  in  the  form  of  net 
earnings  diverted  from  interest  payment,  or  it  may  be 
raised  through  the  sale  of  receivers'  certificates.  Both 
methods  are  usually  employed.  It  is  an  easy  matter  to  de- 
fault on  a  larger  amount  of  interest  than  is  warranted  by 
the  actual  deficit  in  net  earnings,  in  order  to  expend  the 
difference  in  improving  the  condition  of  the  road.  The 
bondholders  have  no  redress  unless  they  can  show  the  court 
that  the  proposed  expenditure  is  an  improper  and  unneces- 
sary outlay,  and  this  is  seldom  the  case.  Receivers'  certifi- 
cates are  interest-bearing  evidences  of  indebtedness,  backed 
by  the  pledged  faith  of  the  court  that  the  property  sub- 
ject to  its  jurisdiction  will  be  sold  if  need  be  to  provide 
for  their  payment.  They  are  negotiable  only  in  the  sense 
that  they  may  be  transferred  by  delivery  or  indorsement, 
and  they  are  issued  only  for  a  short  term.  Their  claim 
upon  the  property  is  usually  prior  to  that  of  the  first 
mortgage  bonds,  and  they  may  be  issued  in  the  face  of 
opposition  of  the  holders  of  such  bonds,  on  the  ground  that 
they  merely  appropriate  in  advance  a  portion  of  the  value 
of  the  property  in  order  that  a  greater  value  may  be  saved 
from  destruction.^^ 

Receivers'  Certificates. — Certificates  were  at  first  au- 
thorized only  in  cases  of  extreme  necessity,  but  their  use 
has  been  extended  to  cover  almost  any  expenditure  which 
the  court  may  think  beneficial  to  the  property.  They  may 
be  used,  however,  only  for  the  specific  purpose  named  by 
the  court  at  the  time  they  are  authorized.  They  are  issued 
in  several  contingencies;  when  there  has  been  a  diversion 

38  Allen,  "Injunction  and  Organized  Labor,"  Anier.  Bar  Assoc, 
Report,  XVII,  312-21. 

88  Myer  v.  Johnston,  53  Alabama,  237. 

243 


RAILROAD  FINANCE 

for  the  benefit  of  bondholders  of  earnings  which  should 
have  gone  to  pay  current  expenses ;  when  there  is  need  for 
betterments  and  additions  to  property;  and  when  the  con- 
struction of  additional  mileage  is  advisable.  In  some  in- 
stances they  have  been  issued  to  redeem  securities  held 
against  the  floating  debt,  as  in  the  case  of  the  Northern 
Pacific  in  1893.^"  Back  claims  for  wages  and  supplies 
have  often  been  paid  out  of  the  proceeds  of  receivers' 
certificates.  The  receivers  of  the  Dayton,  Fort  Wayne,  and 
Chicago  in  1888  issued  $370,000  of  certificates  to  pay  debts 
for  labor  and  supplies  incurred  during  six  months  prior 
to  the  default,"*^  and  the  Atchison  receivers  were  authorized 
in  1894  to  issue  $250,000  of  certificates  for  back  wages.*' 
In  the  case  of  the  Philadelphia  and  Reading,  the  principle 
was  so  extended  as  to  allow  the  receivers  to  issue  certifi- 
cates to  pay  Drexel  and  company  for  past  advances  for  in- 
terest on  the  consolidated  mortgage  bonds.^^  Appro- 
priations for  betterments  and  for  additional  equipment  are 
regularly  made  out  of  the  proceeds  of  these  certificates. 
In  1889  the  receivers  of  the  Chicago  and  Atlantic  were 
authorized  to  issue  $250,000  in  certificates  to  restore  the 
road  to  proper  condition,**  and  the  receivers  of  the  Atlan- 
tic and  Danville  issued  the  same  amount  for  betterments 
in  1891.*^  The  receivers  of  the  New  York,  West  Shore, 
and  Buffalo  in  1885  were  authorized  to  issue  certificates  to 
the  amount  of  $3,300,000  for  the  purchase  of  locomotives 
and  machinery.***  To  complete  the  unfinished  portions  of 
the  road,  the  receivers  of  the  St.  Vincent  extension  of  the 
St.  Paul  and  Pacific  in  1873  issued  debentures  to  the 
amount  of  $5,000,000,*^  and  the  receivers  of  the  Chicago, 
Clinton,     and     Western     were     authorized     in     1876     to 

40  Chronicle,  LVII.  376. 

iilbid.,  XLVI,  448.  **  Ibid.,  XLIX,  206. 

42  Ibid.,  LIX.  228.  45  Ibid.,  LII,  462. 

43  76iU,  XXXVTTT,  731.  i^  Ibid.,  XL,  363. 

47  Kennedy  v.  St.  Paul  and  Pacific,  2  Dillon   (U.  S.),  448. 

244 


RECEIVERSHIP 

complete  the  line,  and  to  issue  certificates  in  pay- 
ment.^® 

The  bondholders  in  the  Wabash  case  of  1884  protested 
against  the  issue  of  $2,000,000  of  certificates,  on  the 
ground  that  as  they  had  not  sought  the  receivership,  noth- 
ing could  be  placed  in  advance  of  their  lien.  The  court 
ordered,  however,  that  as  the  purpose  of  those  certificates 
was  to  pay  for  back  claims  against  the  property,  they 
might  be  given  a  lien  superior  to  the  general  mortgage, 
but  that  all  certificates  issued  for  other  purposes  should 
rank  after  the  bonds.*^  In  189-1  the  Northern  Pacific  re- 
ceivers were  authorized  to  issue  $5,000,000  in  certificates, 
secured  by  a  lien  on  securities  in  the  treasury  and  on  the 
income  of  the  property,  and  also  by  a  lien  on  the  property 
itself,  subject  to  the  general  mortgage. ^° 

Excessive  Issues. — The  extreme  liberality  with  which 
courts  have  authorized  the  issue  of  certificates  has  neces- 
sarily resulted  in  abuse,  and  solvent  properties  have 
been  loaded  with  indebtedness  which  has  brought  loss  upon 
the  bondholders.  In  the  case  of  the  Vermont  and  Canada, 
the  debt  of  this  character  was  sufficient  to  wipe  out  practi- 
cally the  entire  assets  of  a  road  which  was  never  in  de- 
fault save  by  agreement.^^ 

Termination  of  Receivership. — Receiverships  may  be 
terminated  at  the  discretion  of  a  court  of  jurisdiction, 
either  upon  the  removal  of  conflicting  claims,  or  as  is  gen- 
erally the  case,  upon  sale  of  the  property  and  distribution 
of  the  proceeds  for  the  satisfaction  of  the  various  claims. 
In  the  case  of  temporary  appointments,  the  receiver  will 
be  dismissed  when  the  court  is  satisfied  that  the  causes  of 

48  Bank  of  Montreal  v.  Chicago,  Clinton,  and  Western,  48  Iowa, 
518. 

49  Chronicle,  XXXVIII,  731,  754. 

50  Ibid.,  LIX,  651. 

51  Godkin,  "The  Courts  as  Railway  Managers,"  Albany  Law  Rev., 
XXXII,  45-7;  "Receivers,"  by  "A.  Q.  K.,"  New  Jersey  Law  Jour.,  V, 
292-4. 

245 


RAILROAD  FINANCE 

embarrassment  are  no  longer  operative.  Thus  the  re- 
ceivership of  the  Denver  and  Rio  Grande,  which  arose  out 
of  a  controversy  with  the  Atchison  over  the  right  of  way 
through  the  canon  of  the  Arkansas,  was  terminated  in  1888, 
when  the  United  States  supreme  court  handed  down  a  de- 
cision in  favor  of  the  Denver  and  Rio  Grande.^-  Similarly, 
when  reorganization  has  been  effected  without  necessity  for 
foreclosure  sale,  the  receiver  is  dismissed  and  the  property 
restored  to  the  company.  Thus  the  New  York  and  New 
England  receiver  was  removed  in  1885,  upon  representation 
to  the  court  that  the  property  was  able  to  pay  the  interest 
upon  the  second  mortgage  bonds.^^ 

Foreclosure. — An  order  of  the  court  is  required  before  a 
foreclosure  sale  may  be  carried  out;  and  such  an  order 
will  be  given  only  in  response  to  a  petition  from  a  respon- 
sible party  in  interest.  When  a  court  enters  a  decree  in 
foreclosure,  it  gives  instruction  as  to  the  manner  of  sale, 
and  usually  names  an  "upset"  or  minimum  price.  The 
property  may  be  offered  as  a  whole  or  in  several  parcels. 
The  land  grant  and  railroad  property  of  the  Atlantic  and 
Pacific  were  sold  separately  in  1876,^*  and  the  Kentucky 
Central  in  1887  was  sold  in  two  parcels,  one  made  up 
of  the  roadway  and  leaseholds  and  the  other  of  rolling 
stock.^^ 

Beorganization. — Usually  the  court  will  wait  until  an 
acceptable  plan  of  reorganization  has  been  devised  before 
entering  a  decree.  When  satisfied  that  the  conditions  of 
the  sale  have  been  complied  with,  the  court  will  confirm  the 
transaction,  but  this  does  not  necessarily  terminate  the  re- 
ceivership ;  for  in  ease  payment  is  made  in  installments  a 
default  may  occur.  The  receiver  is  therefore  kept  in  con- 
trol for  such  a  period  as  is  required  to  close  out  the  affairs 
of  the  company  to  the  satisfaction  of  the  court,  and  to  dis- 

52  Chronicle,  XXXI,  44.  54  ibid.,  XXIII,  278. 

S3 /bid.,  XLI,  745.  55/61(7.,  XLIV,  551,  653. 

246 


RECEIVERSHIP 

tribute  the  proceeds  arising  from  the  sale.  Practically, 
receivership  ends  with  the  delivery  of  the  property  to  the 
purchasers,  but  the  receiver  is  discharged  only  after  the 
court  has  had  opportunity  to  examine  his  accounts  and  to 
release  him  from  his  bond. 


CHAPTER  XIV 

REORGANIZATION 

Why  Reorganization  is  Necessary. — The  principles  of 
public  policy  and  of  justice  which  make  impossible  the 
strict  enforcement  of  the  contractual  rights  of  bondholders 
and  make  expedient  the  appointment  of  receivers,  require 
the  parties  in  interest  in  a  defaulting  railroad  to  agree 
upon  some  plan  of  financial  adjustment.  The  railroad 
as  a  public  highway  must  be  operated;  and  until  the  cor- 
poration is  able  to  effect  a  settlement,  the  mortgage  trus- 
tee or  the  receiver  must  attend  to  its  management.  Even 
after  the  properties  are  closed  out  by  judicial  sale,  there 
is  the  same  imperative  demand  for  uninterrupted  service. 
A  thorough  overhauling  of  financial  organization  and  re- 
lationships is  usually  necessary  to  restore  an  insolvent  rail- 
road to  a  condition  of  stability. 

Special  Reasons  for  Re-adjustment  witJiont  Foreclos- 
ure.— Reorganization  may  be  effected  without  resort  to  fore- 
closure; in  which  case  the  existence  of  the  old  corporation 
continues  unaltered,  the  only  change  being  the  retire- 
ment of  old  bonds  and  usually  of  the  old  shares,  and  the 
issue  of  new  bonds  and  shares  in  their  place.  Leaving  out 
of  consideration  those  railroads  which  have  been  in  the 
hands  of  temporary  receivers,  certain  cases  may  be  cited 
in  which  for  special  reasons  railroad  property  in  default 
has  not  been  foreclosed  but  restored  by  the  receiver  to  the 
former  management.  The  Philadelphia  and  Reading  was 
thus  surrendered  by  the  receivers  in  1884,  and  again  in 
1887,  because  it  was  then  thought  that  without  the  original 
charter  there  could  be  no  way  under  the  Pennsylvania 
constitution  of  1874  to  continue  the  relationship  with  the 

248 


REORGANIZATION 

Philadelphia  and  Reading  Coal  and  Iron  company.^  The 
International  and  Great  Northern  in  1892,^  and  the  Fort 
Worth  and  Denver  City  in  1895,  were  restored  to  the  orig- 
inal proprietors,  because  under  their  charters  they  were 
immune  from  much  of  the  Texas  restrictive  legislation.' 
The  affairs  of  the  Wisconsin  Central  were  readjusted  with- 
out foreclosure  in  1879,  because  the  tax  exemption  upon  its 
land  grant  could  not  be  transferred  to  another  company.* 
In  the  absence  of  some  such  cause,  it  is  possible  to  bring 
the  conflicting  interests  to  an  agreement  only  when  the 
securities  are  closely  held,  as  in  the  case  of  the  Wisconsin 
Valley  in  1878,^  and  the  Chesapeake  and  Ohio  in  1886.« 
But  the  Missouri,  Kansas,  and  Texas  was  restored  to  the  old 
management  after  the  receivership  of  1888-91,  because  of 
the  general  belief  that  the  embarrassment  had  been  due  to 
the  trickery  of  Jay  Gould,  who  had  operated  the  road  for 
the  benefit  of  the  Missouri  Pacific.^  And  the  Texas  and 
Pacific,  which  had  been  sold  under  foreclosure  in  1887,  was 
reorganized  by  agreement  of  all  parties  in  interest  in  1888, 
when  that  sale  was  unexpectedly  set  aside  by  a  higher 
court.* 

While  the  term  "reorganization"  has  been  loosely  ap- 
plied to  all  measures  employed  to  readjust  corporate 
finances,  it  is  customary  to  restrict  its  application  to  those 
proceedings  by  which  the  affairs  of  a  corporation  are  closed 
out  through  judicial  sale  and  taken  over  by  a  new  corpora- 
tion. A  general  agreement  of  the  parties  in  interest,  ac- 
cording to  this  view,  must  result  not  in  a  reorganization,  but 

1  Commercial  and  Financial  Chronicle,  XXXIX,  494;  Poor's  Man- 
ual,  1887:   281. 

2  Chronicle,  LIV,  366. 

3  Ibid.,  LXII,  40. 

4  Annual  report,   1879. 

5  Carv,  "Organ,  and  Hist,  of  the  Chicago,  Milwaukee,  and  St. 
Paul,"  244. 

0  Chronicle,  XLVII,  81,  410. 

7  Ibid.,  XLVII,  256. 

8  Ibid.,  XLV,  G43 ;  XLVI,  539 ;   XLVII,  532. 

249 


RAILROAD  FINANCE 

in  a  recapitalization  or  a  compromise  settlement  of  corpo- 
rate indebtedness. 

The  Principle  TJnderlyhig  a  Mortgage. — English  railroad 
mortgages  constitute  liens  not  upon  the  body  of  the  corpo- 
rate estate  but  upon  the  franchise  for  collecting  tolls,  which 
is  in  effect  a  pledge  of  earnings.  Thus  a  distinction  is  rec- 
ognized between  railroads  and  corporations  of  a  purely 
private  sort.  In  this  country  railroad  property  has  been 
mortgaged  upon  the  theory  that  in  case  of  default,  the  cred- 
itor may  foreclose,  and  satisfy  his  claim  out  of  the  pro- 
ceeds of  the  sale.  While  this  was  carried  out  in  numerous 
instances  in  the  early  period,  and  the  share  capital  and  gen- 
eral debts  were  wiped  out,  it  was  not  long  before  it  was  seen 
that  a  literal  enforcement  of  the  terms  of  the  mortgage 
worked  injustice  to  subordinate  interests.  Shareholders 
soon  learned  that  they  might  resort  to  technical  legal  meas- 
ures to  embarrass  the  progress  of  foreclosure  proceedings, 
and  so  force  a  compromise  by  which  they  might  be  allowed 
to  continue  as  parties  in  interest  by  submitting  to  an  equit- 
able sacrifice.  A  reorganization  including  all  the  conflict- 
ing parties  has  therefore  come  to  be  recognized  as  the  only 
way  to  bring  about  foreclosure  within  a  reasonable  period, 
and  restore  the  affairs  of  a  defaulting  corporation  to  a 
proper  working  basis.  In  consequence,  ''strict"  foreclos- 
ure, involving  the  extinction  of  share  capital  and  junior 
liens,  is  no  longer  exercised  save  in  exceptional  cases;  and 
foreclosure  proceedings  in  advance  of  the  adoption  of  a 
plan  of  reorganization  are  usually  instituted  only  for  the 
purpose  of  bringing  some  recalcitrant  party  within  the 
terms  of  the  agreement. 

Administrative  Purpose  of  Reorganization. — A  financial 
reorganization  of  a  railroad  company  is  a  non-judicial 
means  whereby  a  "settlement"  is  effected,  usually,  how- 
ever, after  action  has  been  begun  in  court  for  the  settlement 
of  such  claims,  in  lieu  of  payment  of  the  claims  of  all  parties 

250 


REORGANIZATION 

in  interest  against  the  insolvent  debtor.  The  administrative 
purpose  of  the  reorganization  is  to  relieve  the  court  and  its 
receiver  of  responsibility  for  the  management  of  the  prop- 
erty by  placing  it  in  the  hands  of  proprietors  who  are  com- 
petent to  conduct  the  affairs  of  the  corporation  in  such  man- 
ner as  the  public  interest  may  require,  and  who  are  able 
to  meet  the  obligations  of  the  corporation  to  its  creditors. 
In  most  cases  the  settlement  by  sale  of  conflicting  credit 
claims  against  a  railroad  company  is  manifestly  impos- 
sible. The  corporation  itself  seeks  relief;  and  the  several 
parties  in  interest  find  it  to  their  advantage  to  reach  some 
form  of  agreement  for  the  readjustment  of  rights  which 
will  receive  approval  by  the  court. 

Financial  Purpose  of  Reorganization. — The  object  which 
is  sought  through  reorganization  is  to  remove  the  sources 
of  financial  difficulty,  and  thus  to  relieve  all  parties  in  in- 
terest of  the  results  of  default.  This  may  involve  payment 
of  the  floating  debt  and  refunding  of  back  claims  for  in- 
terest and  for  other  purposes,  reduction  of  fixed  charges, 
and  provision  for  working  capital  and  betterments.  The 
payment  of  the  floating  debt  and  the  refunding  of  inter- 
est is  of  first  importance,  since  non-payment  of  these  is 
usually  the  immediate  cause  of  insolvency.  Otherwise  they 
must  continue  to  be  a  menace  to  the  successful  manage- 
ment of  the  corporation  until  they  have  been  paid  or  fi- 
nanced in  such  manner  that  they  may  be  gradually  reduced 
during  a  definite  term  of  years.  The  physical  condition  of 
the  property  next  demands  attention;  since  without  road- 
bed, track,  bridges,  and  equipment  in  proper  condition,  the 
company  would  be  unable  to  handle  traffic  safely  and  eco- 
nomically, the  public  interest  could  not  be  served,  and  the 
rights  of  investors  would  be  unprotected.  Fixed  charges 
must  be  reduced,  as  inability  to  meet  them  and  at  the 
same  time  provide  adequately  for  operation  and  main- 
tenance is  the  chief  cause  of  the  floating  debt. 

251 


RAILROAD  FINANCE 

Reorganization  Committees. — Immediately  after  the  ap- 
pointment of  a  receiver,  it  is  the  practice  to  form  com- 
mittees to  represent  the  different  classes  of  security  hold- 
ers and  to  protect  their  interests  in  the  reorganization. 
Usually  such  committees  are  self-constituted.  A  few  large 
individual  holders  will  usually  appoint  themselves,  and 
seek  the  support  of  other  holders  of  the  same  issue.  As- 
senting securities  are  placed  on  deposit  in  a  trust  com- 
pany, and  when  the  majority  of  an  issue  assents  and  pays 
the  small  assessment  necessary  to  defray  expenses,  the  com- 
mittee becomes  representative.  Sometimes  more  than  one 
committee  is  formed  to  represent  a  single  issue.  In  some 
cases,  also,  committees  are  appointed  to  represent  foreign  in- 
terests. When  committees  of  shareholders  are  formed,  it 
is  usually  because  a  plan  of  reorganization  lias  been  pro- 
posed which  is  manifestly  unfair.  The  Texas  and  Pa- 
cific shareholders  in  1886  united  in  opposition  to  a  plan 
calling  for  an  assessment  to  the  amount  of  two-thirds  of 
their  holdings,  and  succeeded  in  reducing  it  to  five  per 
cent.'* 

The  reorganization  plan  which  is  ultimately  agreed  upon 
is  usually  the  result  of  compromise.  Whether  originally 
proposed  by  the  representatives  of  the  former  management 
or  by  a  committee  of  bondholders,  many  adjustments  are 
required  to  remove  the  opposition  of  the  other  parties  in 
interest.  Some  of  the  committees  representing  special  in- 
terests may  have  little  foundation  upon  which  to  base  their 
claims,  but  all  have  power  to  annoy  and  delay  those  who 
are  most  concerned  in  bringing  affairs  to  an  equitable  work- 
ing basis.  Plans  which  are  put  forth  by  the  former  man- 
agement rarely  become  effective,  for  bondholders  are  likely 
to  suspect  that  the  proposed  remedy  is  inadequate,  and 
even  that  it  may  be  designed  to  divert  attention  from  the 
real  cause  of  the  difficulty.     The  directors  of  the  Atchison, 

» Ibid^  XLlh  632. 

252 


REORGANIZATION 

however,  proposed  an  acceptable  plan  of  reorganization 
in  1889.^° 

Bankers  as  Disinterested  Parties. — When  conflicting  in- 
terests are  unable  to  come  together  upon  any  practicable 
basis,  there  must  be  resort  to  a  disinterested  party.  With 
the  reorganization  in  charge  of  a  banking  house,  there  is 
less  suspicion  on  the  part  of  the  representatives  of  special 
interests.  There  is  also  more  opportunity  to  learn  the 
actual  state  of  affairs.  After  three  plans  for  the  reorgani- 
zation of  the  New  York,  West  Shore,  and  Buffalo,  had  been 
abandoned,  the  affairs  were  placed  in  charge  of  J.  P. 
Morgan  and  companj^,  who  formulated  a  plan  upon  which 
agreement  was  possible. ^^  In  the  same  way  this  house 
took  charge  of  the  reorganization  of  the  Philadelphia  and 
Reading  in  1895  after  two  plans  proposed  by  the  reorgan- 
ization committee  had  failed. ^- 

Deposit  of  Securities. — In  assenting  to  a  plan  of  reorgani- 
zation, the  various  committees  and  individual  interests 
bring  their  securities  together  in  a  single  depositary,  and 
surrender  them  to  the  reorganization  committee  which  has 
the  work  of  rehabilitation  in  charge.  Wlien  it  has  received 
the  assent  of  a  majority  of  the  security  holders  concerned, 
this  committee  will  usually  set  a  time  limit  within  which 
further  deposits  will  be  received.  Often  a  small  penalty 
is  imposed  upon  all  securities  deposited  after  a  given 
date.  When  in  1888  the  reorganization  committee  of  the 
Chesapeake  and  Ohio  had  received  deposits  of  seven-eighths 
of  the  securities  of  the  company,  it  imposed  a  penalty  of 
two  per  cent,  upon  all  classes  of  bonds  and  one-half  of  one 
per  cent,  upon  the  shares  which  remained  outstanding; 
and  after  ninety-six  per  cent,  of  the  securities  had  been 
deposited,  a  time  limit  was  set.^^ 

Rights   of   Disse7itie7it   Interests. — Notwithstanding   the 

10  Ibid.,  XLIX,  504.  12  Ibid.,  LX,  43. 

iilbid.,  XLI,  100,  242.  ^^^  Ibid.,  XLV,  448;   XLVII,  81. 

253 


RAILROAD  FINANCE 

opposition  of  a  dissentient  minority,  the  courts  are  usually 
disposed  to  favor  reorganization  plans  when  they  are  fair, 
and  when  the  majority  in  interest  approves  them.     This 
applies   to   bondholders   as   well   as   shareholders;   for  al- 
though bondholders  are  not  necessarily  bound  by  the  will 
of  a  majorit.y,   the  courts  recognize  that  railroad  bonds 
are  a  peculiar  class  of  securities,  and  that  the  relation- 
ship among  bondholders  is  analogous  to  that  existing  among 
the  shareholders.     In  the  words  of  the  United  States  su- 
preme court:  "To  allow  a  small  minority  of  bondholders, 
representing  a  comparatively  insignificant  amount  of  the 
mortgage  debt,  in  the  absence  of  any  pretense  of  fraud  or 
unfairness,  to  defeat  the  wishes  of  such  an  overwhelming 
majority  of  those  associated  with  them  in  the  benefits  of 
their  common  security,  would  be  to  ignore  entirely  the 
relation  which  bondholders,  secured  by  a  railroad  mort- 
gage, bear  to  each  other. ' '  ^*    Shareholders  who  do  not  sub- 
scribe to  the  terms  of  the   agreement  are  removed  from 
further  participation  in  the  affairs  of  the  insolvent  prop- 
erty, though  they  may  escape  absolute  loss  by  selling  out  to 
those  who  are  willing  to  comply  with  the  conditions  pre- 
scribed  by   the   reorganization   committee.     Non-assenting 
bondholders  have  only  the  right  to  share  in  the  cash  pro- 
ceeds of  the  foreclosure  sale.     Thus  in  the  decree  of  sale 
of  the  property  of  the  Houston  and  Texas  Central  in  1888, 
the  court  ordered   that  the  $2,000,000   of  first  mortgage 
bonds  (constituting  one-fourth  of  the  total  issue)   remain- 
ing out  of  the  reorganization  agreement  should  be  paid  off 
in  cash.^^     In  most  cases  bondholders  gain  from  partici- 
pating in  the   reorganization.     The  unassented  bonds   of 
the  Union  Pacific  were  paid  off  principal  and  interest  in 
1898,  each  receiving  103,  while  at  the  same  time  the  as- 
sented bonds  were  quoted  at  116.'"' 

14  Shaw  V.  Railroad  Company,  100  U.  S.,  605. 

15  Chronicle,  XLVI,  573.  i«  Ibid.,  LXVI,  84. 

254 


REORGANIZATION 

Advantage  of  Bondholder's  at  Foreclosure  Sale. — The 
plan  of  reorganization  is  usually  agreed  upon  in  advance 
of  sale,  and  the  courts  will  generally  delay  entering  a  de- 
cree until  after  this  is  arranged.  It  is  customary,  also,  for 
the  courts  to  allow  the  purchasing  bondholders  to  turn  over 
their  bonds  in  payment,  usually  to  the  extent  of  ninety-five 
per  cent,  of  the  price.  The  bondholders,  therefore,  have 
the  advantage  in  bidding,  for  any  contesting  party  must 
provide  cash.  Even  this  advantage  is  not  always  sufficient 
to  insure  control.  Interests  representing  the  Atlantic 
Coast  Line  bought  the  Cape  Fear  and  Yadkin  at  a  fore- 
closure sale  in  1898,  in  opposition  to  the  reorganization 
committee,  which  was  acting  in  the  interest  of  the  Sea- 
board Air  Line.^^ 

The  new  corporation  which  is  created  according  to  the 
terms  of  the  reorganization  agreement  is  free  from  the 
claims  against  the  old  company  on  account  both  of  con- 
tracts and  of  debts,  except  those  which  were  superior  in 
lien  to  the  bonds  under  which  the  foreclosure  sale  was  ef- 
fected. The  purchasers  of  a  railroad  foreclosed  under 
a  second  mortgage  must  therefore  assume  the  entire  amount 
of  the  first  mortgage  bonds.  They  are  also  bound  by  the 
terms  under  which  the  right  of  way  was  originally  granted, 
and  by  such  additional  obligations  as  they  agree  to  assume. 
On  the  other  hand,  special  privileges  such  as  exemption 
from  taxation,  which  were  not  essential  to  the  purposes 
of  the  old  company,  are  extinguished  by  foreclosure.  The 
formation  of  a  new  corporation  after  foreclosure  does  not 
of  itself  work  the  dissolution  of  the  old  company,  though  in 
most  cases  its  affairs  are  immediately  wound  up.  The  old 
Northern  Pacific  railroad  company,  whose  property  was 
sold  under  foreclosure  in  1896,  is  still  in  existence,  and  an- 
nual meetings  are  regularly  held,  notwithstanding  the  fact 
that  the  rights  of  the  shareholders  were  wiped  out. 

17  Ibid.,  LXVII,  1355. 

255 


RAILROAD  FINANCE 

Sacrifices  of  Shareholders. — It  is  through  the  exchange 
of  securities  of  the  new  corporation  for  the  old  issues  that 
the  purposes  of  reorganization  are  effected.  The  most 
pressing  object  to  be  attained  is  the  payment  of  the  float- 
ing debt,  which  generally  consists  largely  of  short  term 
loans  secured  by  collateral.  Surrender  of  the  securities 
constituting  this  collateral  would  involve  such  a  sacrifice 
that  it  is  not  usually  to  be  thought  of.  This  was  done, 
however,  by  the  Missouri,  Kansas,  and  Texas  in  1876.^^ 
The  reorganization  committee  must  therefore  provide  the 
necessary  capital  out  of  the  contributions  of  the  sharehold- 
ers and  the  proceeds  of  the  new  bonds.  To  do  this  it  is 
necessary  to  determine  how  the  loss  shall  be  apportioned 
among  the  various  parties  in  interest,  and  this  is  a  task  re- 
quiring the  highest  judgment  and  the  fullest  knowledge, 
both  of  the  affairs  of  the  particular  corporation  and  of 
the  world  of  finance.  For  the  information  of  the  Atchison 
reorganization  committee  a  thorough  physical  examination 
was  made,  and  the  books  of  account  for  four  years  pre- 
ceding the  default  were  subjected  to  detailed  scrutiny.^^ 
And  the  committee  charged  with  the  preparation  of  a 
plan  for  the  reorganization  of  the  Colorado  Midland  in 
1895,  deferred  action  until  the  property,  which  had  been 
leased  to  the  Atchison,  could  have  time  to  demonstrate  its 
independent  earning  capacity.^^ 

Assessments. — The  shareholders  of  an  insolvent  railroad 
are  almost  always  justified  in  the  belief  that  whatever  the 
present  value  of  their  shares,  the  future  will  bring  some  re- 
turn; therefore  they  are  usually  willing  to  submit  to  some 
sacrifice,  provided  they  may  thereby  obtain  an  interest  in 
the  new  corporation.  This  facilitates  the  work  of  the  re- 
organization committee,  for  it  provides  a  means  by  which 
money  may  be  raised  to  redeem  the  collateral  behind  the 

IS  Ibid.,  XXII,  447.  20  Ibid.,  LXI,  557. 

19  Ibid.,  LIX,  87G,  1006. 

256 


REORGANIZATION 

floating  debt  and  to  provide  for  the  current  needs  of  the 
property.  Most  reorganization  plans,  therefore,  provide 
that  shareholders  may  participate  by  purchasing  a  certain 
proportionate  amount  of  share  capital  in  the  new  com- 
pany. The  New  York  and  New  England  plan  of  1894 
allowed  preferred  shareholders  to  buy  new  preferred 
shares  to  the  amount  of  twenty-five  per  cent,  of  their 
old  holdings  and  to  exchange  their  old  shares  for  new. 
This  was  in  effect  an  assessment  of  twenty-five  dol- 
lars a  share,  for  which  new  shares  were  returned.-^  But 
whatever  the  need  for  current  funds,  the  committee  must 
restrict  its  demands  upon  the  shareholders  to  such  amounts 
as  they  will  be  willing  to  pay,  for  to  levy  an  excessive  as- 
sessment would  result  in  a  general  surrender  of  the  shares 
and  so  defeat  the  purpose  of  the  committee.  Close  atten- 
tion must  be  given  to  the  opinions  of  each  class  of  security 
holders,  and  arrangements  made  accordingly ;  for  that  plan 
is  best  which  can  be  made  effective.  The  proper  amount 
of  the  assessment  is  therefore  a  matter  of  judgment.  It 
usually  ranges  from  five  dollars  to  twenty  dollars  a  share. 
"Whenever  a  greater  sum  has  been  required,  as  in  the  case 
of  the  Houston  and  Texas  Central  in  1887,  when  an  as- 
sessment of  $71.40  was  levied,  it  has  been  because  the  nom- 
inal capital  was  unusually  small,  or  because  of  some  other 
sufficient  reason.^-  Aside  from  the  willingness  of  share- 
holdei's  to  submit  to  an  assessment,  the  practice  is  justi- 
fied by  the  fact  that  during  the  period  within  which  the 
interest  upon  the  bonds  is  in  default,  money  to  which  the 
bondholders  have  superior  claim  is  diverted  to  the  improve- 
ment of  the  property.  When,  therefore,  shareholders  are 
assessed  after  a  period  of  receivership,  the  process  is  only 
a  restoration  of  money  by  those  who  were  primarily  re- 
sponsible for  the  default. 

New  Securities  to  Represent  Assessment. — Usually,  but 
21  Ibid.,  LVIII,  762.  22  Ibid.,  LI,  84,  493. 

18  257 


RAILROAD  FINANCE 

not    invariably,    shares    are    given    to    represent    an    as- 
sessment, so  that  with  a  return  of  prosperity  the  amount 
may  be  made  good  out  of  earnings.     The   Norfolk  and 
Western   shares   were    assessed    $12.50    in    1896    on    both 
issues.     In  return  the  preferred  shareholders  received  new 
preferred  shares,   and  the  amount  of  the   assessment  in 
new  common  shares.     The  common  shareholders,  however, 
received  nothing  for  their  assessment  except  the  right  to 
convert  their  old  shares  into  seventy-five  per  cent,  of  par 
in  new  common  ^hares.^^     Bonds  have  also  been  issued  in 
return  for  assessments  on  the  shareholders.     In  1885  the 
shareholders  of  the  Texas  and  Pacific  were  assessed  ten 
dollars  a  share,   and  the   amount  of  the   assessment  was 
represented  by  second  mortgage  bonds.-*     The  shares  of 
the  New  York,  West  Shore,  and  Buffalo  the  same  year 
were  exchanged  at  the  rate  of  two  of  the  old  for  one  of 
the  new  shares,  and  the  new  shares  were  subjected  to  an 
assessment  of  five  dollars  each.     In  return  for  the  assess- 
ment certificates  were  issued  redeemable  in  first  mortgage 
bonds  at  par.^°     Assessments  are  not  always  exacted  as 
the  price  of  permitting  shareholders  to  continue  as  parties 
in  interest,  for  there  may  be  good  prospect  that  current 
earnings,  with  the  natural  increase  certain  to  follow  a  res- 
toration of  the  property  as  a  going  concern,  will  prove 
sufficient    for    all    immediate    needs.     The    old    preferred 
shares   of  the   Detroit,   Lansing,   and  Northern  were   ex- 
changed under  the  plan  of  1896  for  an  equal  number  of 
new  common  shares  and  not  assessed.-*^ 

Partial  Loss  of  Proprietorship. — But  a  sacrifice  may  be 
imposed  in  the  form  of  a  loss  of  proprietorship,  as  in  the 
case  of  the  Chicago,  St.  Paul,  and  Fond  du  Lac,  which 
was  reorganized  in  1859  as  the  Chicago  and  North  West- 
ern upon  a  plan  by  which  new  shares  were  exchanged  for 

23/6id.,  LXII,  641.  25  Ibid.,  XL,  626. 

2*  Ibid.,  XLIII,  163,  218.  ^dbid.,  LXII,  319. 

258 


REORGANIZATION 

old  at  sixty  cents  on  the  dollar.-*  Conversion  may  be  re- 
quired into  other  forms  of  securities  upon  terms  which 
either  greatly  reduce  the  possible  return  or  make  the 
chance  for  any  return  exceedingly  remote.  The  Chicago, 
Dubuque,  and  Minnesota  shareholders  in  1876  surrendered 
all  claim  to  proprietorship  in  exchange  for  a  small  number 
of  new  mortgage  bonds,  which  were  distributed  propor- 
tionatel3\^^  The  Chicago  and  Atlantic  shares  were  ex- 
changed in  1890  for  income  bonds  at  the  rate  of  forty  per 
cent.'-^  and  common  shares  of  the  Central  Railroad  and 
Banking  company  of  Georgia  were  in  1895  converted  into 
third  preference  income  bonds  at  par.'** 

Assessment  of  Junior  Bondholders. — Because  the 
amount  of  the  assessment  which  may  be  placed  upon  share- 
holders is  measured  by  their  willingness  to  pay,  it  has 
sometimes  been  necessary  for  reorganization  committees  to 
assess  the  junior  bondholders.  The  practice  has  been  fol- 
lowed, however,  only  when  there  has  seemed  no  alterna- 
tive. In  the  reorganization  of  the  Fort  Wayne,  JMuncie, 
and  Cincinnati  in  1881,  the  second  mortgage  bonds  were 
assessed  thirty  per  cent,  and  converted  into  new  shares  at 
par.^'  New  securities  have  usually  been  given  in  such 
cases  to  represent  the  assessment.  When  in  1890  the  sec- 
ond mortgage  bondholders  of  the  Cincinnati,  Washington, 
and  Baltimore  were  subjected  to  a  call  of  five  per  cent., 
they  received  twice  the  amount  of  the  assessment  in  second 
income  bonds. "- 

Conversion  of  Bonds  into  Shares. — Not  infrequently  the 
two  methods  have  been  combined;  the  bonds  being  con- 
verted, and  the  amount  of  the  assessment  being  returned  in 
some  inferior  bond  or  in  shares.  The  East  Tennessee,  Vir- 
ginia,  and  Georgia  income  bonds  were  assessed  in   ]88G 

27  Annual  report,  18G5.  ao/birf.,  LX,  1008. 

2S  Chronicle,  XXlII,  232.  s^  Ihid.,  XXXTl,  577. 

zalbid.,  L,  621.  '^i- Ibid.,  XLIX    82. 

259 


RAILROAD  FINANCE 

and  converted  into  second  preferred  shares  at  par,  while 
the  assessment  was  represented  by  first  preferred  shares.^^ 
The  Atchison  second  mortgage  bondholders  in  1895  paid 
an  assessment  of  four  per  cent.,  which  was  returned  in  the 
form  of  preferred  shares,  and  the  bonds  themselves  were 
converted  into  preferred  shares.^* 

The  Margin  of  Safety. — It  is  customary  in  reorganiza- 
tion proceedings  to  take  the  earnings  for  a  period  of  years 
immediately  preceding  the  default,  and  to  formulate  a 
plan  which  will  allow  a  margin  over  fixed  charges  suffi- 
cient to  insure  stability.  It  is  then  necessary  to  determine 
the  apportionment  of  these  claims  upon  corporate  income 
among  the  secured  creditors  and  leaseholders.  Our  Amer- 
ican system  of  financing  construction  out  of  the  proceeds 
of  bonds  has  encumbered  railroad  property  with  a  con- 
fusion of  liens.  The  result  has  been  that  inunediately 
above  the  original  first  mortgage,  there  have  accumulated 
separate  strata  of  junior  liens,  each  constituting  a  con- 
tractual liability.  A  large  proportion  of  these  junior 
securities  were  originally  issued  to  contractors  in  payment 
for  construction  at  extravagant  prices,  and  they  were  al- 
most invariably  placed  upon  the  market  at  heavy  discount. 
Such  bonds  as  these,  it  is  the  duty  of  the  reorganization 
committee  to  examine  closely  to  determine  to  what  extent 
they  have  contributed  to  the  earning  capacity  of  the  prop- 
erty. In  doing  this  the  committee  will  not  be  disposed  to 
attach  much  weight  to  the  terms  of  the  mortgages.  Such 
instruments  at  best  give  only  nominal  security,  for  it  is 
practically  impossible  for  their  holders  to  enforce  a  fore- 
closure sale,  as  that  would  necessitate  raising  cash  to  re- 
tire the  superior  liens  and  to  pay  the  heavy  expenses  of 
the  sale.  Moreover,  experience  has  demonstrated  that 
when  interest  charges  have  not  been  earned,  the  property 

szlhid.,  XLII,  186. 
34  Ibid.,  LX,  685. 

260 


REORGANIZATION 

subject  to  the  lien  will  usually  fail  to  sell  for  enough  to  pay 
off  the  bonds.  "Railway  mortgages,"  according  to 
Greene,  "are  not  sacred  because  of  the  strong  legal  terms 
in  which  they  are  drawn,  but  are  dependent  upon  success 
in  the  business  of  transportation,  differing  in  this  respect 
from  real  estate  mortgages,  which  rely  more  upon  the  pros- 
perity of  the  whole  community.  .  .  .  Our  practice  of 
railway  receivership  is  thus  a  development  of  our  own  cir- 
cumstances and  a  sort  of  compromise  between  the  too- 
strong  language  of  our  mortgages  and  the  actual  conditions 
of  the  business  of  transportation.""^ 

Reduction  of  Lien  of  Bonds. — Bondholders  may  be  asked 
to  sacrifice  by  submitting  to  a  reduction  of  their  lien,  of 
their  principal,  or  of  their  interest.  Even  the  first  mort- 
gage bonds  may  not  be  exempt  from  disturbance.  The 
New  York,  West  Shore,  and  Buffalo  first  mortgage  bonds 
were  in  1885  converted  into  second  mortgage  bonds  to  al- 
low a  new  first  lien  of  $20,000,000  to  be  created.^^ 

Mortgage  Bonds  Replaced  by  Income  Bonds. — A  reduc- 
tion of  principal  may  be  effected  by  exchanging  old  bonds 
for  part  in  new  bonds  of  equal  rank  and  part  in  a  security 
which  has  only  a  contingent  claim  upon  earnings.  The 
holders  of  East  Tennessee,  Virginia,  and  Georgia  consol- 
idated bonds  in  1886  were  asked  to  receive  in  exchange 
sixty  per  cent,  in  new  consolidated  bonds  and  fifty  per  cent. 
in  first  preferred  shares.^^  It  was  once  the  custom  to 
create  income  bonds  to  exchange  for  regular  mortgage  se- 
curities. These  were  favored  because  on  account  of  their 
name  they  v/ould  command  a  higher  price  than  shares 
upon  the  market,  and  so  enable  their  holders  to  divert  the 
greater  portion  of  their  losses,  and  also  because  their  in- 
terest claims  could  be  enforced  only  when  earned.     But 

35  Greone,  "Commercial  Basis  for  Railway  Receiverships,"  Amer. 
haw  Register,  XXXIII,  425. 

so  Chronicle,  XL,  026.  37  Ibid.,  XLII,   186. 

261 


RAILROAD  FINANCE 

it  soon  became  e\ddent  that  this  new  form  of  security, 
which  professed  to  have  the  stability  of  a  bond  combined 
with  the  elasticity  of  a  share,  was  a  source  of  disappoint- 
ment to  the  investor  and  of  embarrassment  to  the  manage- 
ment of  the  corporation.  Instead  of  being  a  secured 
creditor,  the  holder  of  an  income  bond  is  merely  a  residual 
claimant  to  net  earnings ;  and  while  he  is  entitled  to  in- 
terest in  advance  of  the  shareholders,  he  does  not  share  in 
their  power  of  control  over  the  affairs  of  the  corporation. 
"The  security  of  the  income  bondholder,"  according  to 
Doctor  Edward  S.  Meade,  "is  the  willingness  of  a  board 
of  directors  which  he  has  had  no  share  in  choosing,  to  pay 
over  to  him  sums  of  money  which  they  have  a  perfect  right 
to  expend  on  the  improvement  of  the  property,  a  task 
which  is  never  completed. "  ^^ 

By  Preferred  Shares. — From  the  standpoint  of  the  cor- 
poration, the  income  bond  is  equall}^  unsatisfactory;  for 
it  interferes  with  further  borrowing  except  by  means  of 
bonds  secured  by  special  liens  on  separate  properties. 
The  Atchison  in  1889  placed  an  issue  of  income  bonds  im- 
mediately after  its  general  mortgage,  and  so  made  it  im- 
possible to  raise  additional  capital  by  the  issue  of  more 
bonds.^^  For  a  corporation  thus  to  impose  needless  re- 
strictions upon  its  future  policy  is  to  give  evidence  of 
inefficiency  in  its  management.  Most  reorganization  plans, 
therefore,  now  provide  that  preferred  shares  shall  be  ex- 
changed for  discredited  mortgage  bonds.  Such  shares  are 
entitled  to  dividends  at  a  fixed  rate,  but  only  to  the  extent 
that  they  are  earned.  They  possess  every  virtue  of  the 
income  bond,  and  they  give  in  addition  a  voice  in  the  man- 
agement. ]\Iost  of  the  preferred  shares  on  the  market  to- 
day were  first  issued  in  reorganizations. 

Reduction  of  Bate  of  Interest. — Reduction  of  the  rate  of 

38  Meade,  "Reorganization  of  Railroads,"  Amer.  Acad,  of  Pol.  and 
Soc.  Sci.,  Annals,  XVII,  235.  39  Chronicle,  LX,  685. 

262 


REORGANIZATION 

interest  on  bonds  has  been  a  common  method  of  cutting 
down  fixed  charges.  Each  of  three  separate  issues  of 
bonds  of  the  Missouri,  Kansas,  and  Texas  was  scaled  one 
per  cent,  in  1889/°  and  the  rate  of  the  first  mortgage  bonds 
of  the  Colorado  i\Iidland  was  reduced  from  six  to  four  per 
cent,  in  1897.^^  Sometimes  a  larger  principal  bearing  a 
lower  rate  is  substituted  for  the  old  issue.  The  Northern 
Pacific  plan  of  1896  provided  that  each  six  per  cent,  first 
mortgage  bond  should  be  converted  into  $1350  in  new 
bonds  bearing  four  per  cent,  but  having  equal  rank.^^  In 
other  cases  the  reduction  of  interest  claims  may  be  tem- 
porary. The  Atlantic  and  Pacific  in  1876  is.sued  new 
bonds  to  bear  two  per  cent,  for  two  years,  three  per  cent, 
for  two  years,  four  per  cent,  and  five  per  cent,  each  for  a 
single  year,  and  thereafter  the  original  rate  of  six  per 
cent.*^  A  plan  similar  in  some  respects  was  adopted  by 
the  International  and  Great  Northern  in  1892.  Here  the 
bonds  were  scaled  from  six  to  four  and  a  half  per  cent,  for 
five  years,  and  raised  to  five  per  cent,  at  the  expiration  of 
that  period ;  but  it  was  agreed  that  in  the  event  of  a  de- 
fault lasting  ninety  days  the  original  rate  should  be  auto- 
matically restored.**  The  Atchison  in  1895  combined  this 
feature  with  an  issue  of  income  bonds  by  exchanging  for 
the  old  general  mortgage  bonds,  seventy-five  per  cent,  in 
new  bonds  of  equal  rate  and  lien  and  forty  per  cent,  in 
adjustment  bonds,  which  were  income  bonds  through  a 
period  of  five  years  and  thereafter  a  fixed  obligation.  By 
this  means,  as  the  condition  of  the  company  improved,  the 
bonds  were  restored  to  their  former  basis.*"' 

Underlying  Bonds  not  Disturbed. — However  great  the 
need  of  reducing  fixed  charges,  those  bonds  upon  which  the 
interest  has  been  unquestionably  earned  are  not  disturbed 

40  Ibid.,  XLIV,  .544.  *•'■  Ihid.,  XXIII,  85. 

41  Ibid.,  LXIV,   122(i.  ■•+  Ibid.,   LTV,  203. 
4-^  Ibid.,  LXII,  528,  551.                    45  Ibid.,  LX,  685. 

263 


RAILROAD  FINANCE 

in  the  reorganization.  The  underlying  divisional  bonds 
are  almost  never  touched.  Of  late  years  first  mortgage 
bonds  have  generally  been  found  amply  secured,  and  it  is 
the  consolidated  bonds  and  other  inferior  issues  which  have 
been  most  affected.  None  of  the  divisional  bonds  of  the 
Norfolk  and  Western  were  disturbed  in  the  reorganization 
of  1896/®  and  the  securities  which  thus  escaped  consti- 
tuted a  fifth  of  the  total  capital.  In  the  St.  Louis  and 
San  Francisco  reorganization  of  1896,  only  two-thirds  of 
the  securities  were  disturbed.*^ 

Status  of  the  Reorganized  Corporation. — The  reorgani- 
zation committee  may  formulate  its  plan  without  regard 
to  the  rights  of  other  companies  in  the  matter  of  contracts. 
Such  contracts  w^hether  in  the  nature  of  guarantees,  leases, 
or  traffic  agreements,  apply  only  to  the  old  corporation, 
and  cannot  survive  a  foreclosure  sale.  It  is  therefore  the 
privilege  of  the  committee  to  enter  into  agreements  which 
will  be  less  burdensome  to  the  new  corporation,  or  to  re- 
new those  which  have  been  found  satisfactory.  In  the 
matter  of  leases  the  inability  of  the  owners  of  branch  lines 
to  make  arrangements  with  other  railroads  usually  gives 
the  reorganization  committee  the  advantage  in  determining 
rentals.  Reorganization  may  therefore  result  in  dropping 
off  unproductive  subsidiary  lines.  The  Atchison  in  1895 
surrendered  control  of  the  Colorado  Midland  and  of  the 
St.  Louis  and  San  Francisco.  The  more  usual  effect  of 
reorganizations,  however,  is  to  increase  the  mileage. 
This  is  brought  about  by  a  consolidation  of  the  securities 
of  the  parent  company  with  those  of  subsidiary  lines. 
The  mileage  of  the  Northern  Pacific  increased  from  3429 
to  4374  in  the  reorganization  of  1896;  that  of  the  Denver 
and  Rio  Grande  increased  from  1317  to  1686  in  1886.  A 
notable  increase  was  made  by  the  Erie,  which  in  the  re- 
organization of  the  old  New  York,  Lake  Erie,  and  West- 

i^Ibid.,  LXII,  641.  4T  Poor's  Manual,  1900:  xcii. 

264 


REORGANIZATION 

ern  in  1895  took  over  the  Chicago  and  Erie  and  the  New 
York,  Pennsylvania,  and  Ohio  under  share  ownership,  and 
so  extended  its  operated  mileage  from  544  to  1205. 

Provision  for  Future  of  Neiv  Corporation. — ^While  the 
receivers  of  railroads  usually  make  generous  outlays  in 
order  to  bring  the  property  up  to  a  higher  state  of  effi- 
ciency the  need  for  such  expenditures  is  never  absent,  and 
it  is  for  the  interest  of  all  parties  to  the  reorganization  to 
know  that  betterment  work  will  be  continued  under  the 
new  management.  To  some  extent  provision  is  made  for 
this  need  when  the  current  funds  of  the  corporation  are 
relieved  from  the  weight  of  excessive  fixed  charges,  but 
additional  assurance  may  be  required  for  the  future.  It  is 
desirable,  also,  to  allow  the  new  management  some  latitude 
in  the  matter  of  acquiring  title  to  branch  lines,  equipment, 
or  other  forms  of  property.  Yet  however  much  expendi- 
tures of  this  nature  may  result  in  permanent  addition  to 
earning  power,  the  creditors  will  not  be  disposed  to  sanc- 
tion an  increase  of  capital.  In  many  instances  the  reor- 
ganization agreement  has  provided  that  no  increase  of 
funded  debt  could  be  made  without  the  consent  of  two- 
thirds  of  the  holders  of  those  issues  which  were  compelled 
to  submit  to  sacrifice.  This  has  been  sufficient  to  insure 
conservatism  of  management,  but  it  has  not  allowed 
leeway  for  the  performance  of  those  activities  which  are 
for  the  best  interest  of  all  concerned  in  the  property.  For 
this  reason  it  has  become  common  practice  in  reorganiza- 
tions to  set  aside  a  reserve  of  shares  and  bonds  to  be  issued 
from  time  to  time  for  specific  purposes.  The  reorganized 
West  Shore  began  operations  with  a  reserve  made  up  of 
$25,000,000  of  bonds  and  $10,000,000  of  shares  for  addi- 
tional construction,  betterments,  and  the  purchase  of 
equipment.  The  Denver  and  Rio  Grande  in  1886  was 
given  a  reserve  of  over  $7,000,000,  mostly  in  bonds,  for  the 
same  objects.     The  Colorado  Midland  reorganization  plan 

265 


RAILROAD  FINANCE 

of  1897  provided  that  $1,250,000  of  bonds  should  He  re- 
served for  the  purchase  of  the  Busk  tunnel;  and  the  plan 
of  the  Atchison  in  1895  set  aside  $11,000,000  in  bonds  and 
$9,000,000  in  shares  for  the  purchase  of  new  lines.  Pro- 
vision has  also  been  made  in  this  way  for  the  retirement 
of  outstanding  bonds,  as  in  the  case  of  the  Central  Ver- 
mont, which  by  the  plan  of  1898  set  aside  $3,375,000  for 
this  purpose.  In  most  cases  of  this  sort,  there  are  addi- 
tional restrictions  upon  the  directors  in  the  form  of  limita- 
tions as  to  the  amount  of  securities  which  may  be  issued 
at  any  one  time.  Thus  $25,000,000  of  bonds  were  set  aside 
for  new  capital  needs  of  the  Northern  Pacific  in  accord- 
ance with  the  plan  of  1896,  but  only  $1,500,000  were  to 
be  issuable  in  any  one  year.*® 

A  plan  of  reorganization  which  shall  be  adequate  neces- 
sarily requires  much  labor  in  preparation,  and  when  once 
agreed  upon  by  the  conflicting  interests  it  is  of  the  utmost 
importance  that  nothing  be  allowed  to  render  it  ineffective. 
To  this  end  it  has  become  the  general  practice  in  the  more 
recent  reorganizations  to  arrange  with  an  underwriting 
syndicate  to  guarantee  the  success  of  the  plan  by  agreeing 
to  advance  the  needed  funds  in  all  cases  where  security 
holders  are  unable  or  unwilling  to  participate.  A  syndi- 
cate was  formed  in  connection  with  the  reorganization  of 
the  Buffalo,  New  York,  and  Philadelphia  in  1886  for  the 
purpose  of  guaranteeing  to  take  any  part  of  the 
$23,000,000  of  securities  affected  which  might  not  assent 
to  the  plan.*^  At  the  reorganization  of  the  Cincinnati, 
Washington,  and  Baltimore  in  1890,  a  syndicate  was 
formed  to  take  over  all  shares  and  income  bonds  which 
might  fail  to  pay  assessments,  and  also  to  provide  a  suffi- 
cient amount  of  current  funds  to  carry  out  the  terms  of 
the  reorganization.^"     The  effect  of  such  an  arrangement 

48  76id.,  LXII,  551.  50/6u7.,   XLIX,    82. 

4^  Ibid.,  XLIII,  48. 

266 


REORGANIZATION 

is  to  reassure  doubtful  holders  of  disturbed  securities,  and 
by  showing  them  that  others  are  willing  to  step  in  and 
take  their  places,  induce  them  to  make  the  temporary  sac- 
rifice necessary  to  retain  their  interest  in  the  property. 
In  most  cases  the  underwriting  syndicate  does  more  than 
agree  to  take  the  place  of  dissentient  interests.  It  guaran- 
tees the  sale  of  new  securities  upon  the  market,  and  thus 
insures  the  new  corporation  of  ample  cash  for  its  current 
needs.  The  reorganization  committee  of  the  Minneapolis 
and  St.  Louis  in  1894  arranged  with  a  syndicate  to  pur- 
chase $5,000,000,  or  half  the  total  issue  of  first  consoli- 
dated bonds,  in  addition  to  guaranteeing  the  $25  assess- 
ment upon  each  share.^^  In  the  Philadelphia  and  Read- 
ing reorganization  of  1895,  a  syndicate  agreed  to  take 
$4,000,000  of  new  general  mortgage  bonds  and  $8,000,000 
of  preferred  shares,  and  to  provide  the  immediate  cash 
requirements  under  the  plan  by  guaranteeing  the  assess- 
ments— a  total  guarantee  of  $28,000,000.  In  addition, 
this  syndicate  guaranteed  the  payment  or  extension  of 
$20,000,000  of  bonds  maturing  within  the  next  two 
years.^-  A  syndicate  for  the  subscribed  amount  of 
$45,000,000  was  formed  to  take  care  of  the  financial  re- 
quirements of  the  Northern  Pacific  reorganization  plan  of 
1896.^=* 

The  Voting  Trust. — After  a  railroad  has  been  reorgan- 
ized and  the  receiver  discharged,  it  is  for  the  interest  of  the 
bondholders  to  have  assurance  that  the  property  will  be  op- 
erated according  to  a  consistent  policy,  and  in  such  man- 
ner that  the  security  of  their  mortgages  will  not  be  im- 
paired. This  is  impossible  unless  control  of  the  share  cap- 
ital be  retained  until  it  will  have  some  value  aside  from 
its  voting  power.  In  some  of  the  earlier  reorganizations 
the  bondholders  were  given  power  to  vote  at  shareholders' 

51  Ihid.,  LIX,  371.  53/6id.,  LXII,  553. 

62  Ibid.,  LXI,  1110. 

267 


RAILROAD  FINANCE 

meetings  in  order  that  they  might  protect  their  interests. 
In  1860  the  first  and  second  mortgage  bonds  of  the  Pitts- 
burgh, Fort  Wayne,  and  Chicago  were  given  one  vote  for 
each  two  hundred  dollars  par  value,  and  the  third  mort- 
gage bonds  received  equal  representation  with  the  shares.^* 
In  the  reorganization  of  the  Missouri,  Kansas,  and  Texas 
in  1876,  an  arrangement  was  adopted  whereby  the  posses- 
sion and  management  of  the  property  was  given  over  to 
the  Union  Trust  company  of  New  York,  trustee  under  the 
mortgages,  to  remain  until  two  coupons  should  be  paid  in 
full  on  the  first  mortgage  bonds.  To  assist  in  the  manage- 
ment, provision  was  made  for  an  advisory  board,  two 
members  of  which  should  be  chosen  by  the  mortgage 
trustee,  and  one  each  by  the  bondholders,  the  general 
creditors,  and  the  board  of  directors.^^  Within  recent 
years  it  has  become  the  settled  practice  of  reorganization 
committees  to  require  from  the  shareholders,  irrevocable 
proxies  executed  in  favor  of  a  voting  trust,  the  members 
of  which  are  chosen  either  by  the  mortgage  trustee  or  by 
the  banking  house  concerned  in  the  reorganization  pro-* 
ceedings.  The  voting  trust  elects  the  board  of  directors 
of  the  new  corporation,  but  it  is  more  than  the  agent  of 
the  shareholders.  In  it  is  vested  the  legal  title  to  the  share 
capital  until  such  time  as  the  conditions  subject  to  which 
it  is  created  have  been  fulfilled.  To  the  shareholders  are 
given  certificates  of  beneficial  interest,  which  may  be  trans- 
ferred in  the  same  manner  as  shares,  but  which  may  not 
be  exchanged  for  shares  until  the  dissolution  of  the  trust.°^ 
The  period  for  which  a  voting  trust  may  continue  in  con- 
trol is  usually  contingent  upon  the  payment  of  a  certain 

54  Amer.  Railroad  Jour.,  XXXIV,  646. 

55  Chronicle,  XXII,  305. 

50  See  Burr,  "Validity  of  Voting  Trust  Provisions  in  Recent  Rail- 
road Reorganizations,"  Amer.  Law  Register,  XXXV,  413-37;  Harri- 
man,  "Voting  Trusts  and  Holding  Companies,"  Yale  Law  Jour.,  XIII, 
109-23;  Graser,  "The  Voting  Trust  in  Railway  Finance,"  Raihoay 
World,  XLVIII,  547-8;    Daggett,   "Railroad   Reorganization,"   382-4. 

268 


REORGANIZATION 

number  of  dividends  after  the  expiration  of  a  specific 
term  of  years.  The  trust  may  be  dissolved  at  any  time, 
however,  at  the  discretion  of  its  members.  The  share  cap- 
ital of  the  Philadelphia  and  Reading  v/as  in  1895  placed 
in  trust  for  five  years  and  thereafter  until  the  first  pre- 
ferred shares  should  receive  full  dividends  for  two  con- 
secutive years.^^  In  1897  the  voting  trust  of  the  Southern 
railway  was  established  for  five  years,  but  at  the  expira- 
tion of  that  time  it  was  extended  for  another  five  years 
and  for  such  further  period  as  might  elapse  until  a  ma- 
jority of  shareholders  on  the  date  of  an  annual  election 
of  directors  should  vote  for  its  termination.^^ 

By  means  of  the  voting  trust,  therefore,  the  interests  of 
the  bondholders  are  safeguarded  until  such  time  as  the 
body  of  the  share  capital  acquires  something  in  addition 
to  speculative  value.  But  the  bondholders  are  not  alone 
concerned  with  the  proper  management  of  the  property. 
The  owners  of  the  preferred  shares  represent  former  bond- 
holders, who  were  forced  to  convert  some  of  their  holdings 
into  an  inferior  security.  With  efficient  management, 
these  shares  will  have  stable  value.  It  was  a  feature  of 
the  Northern  Pacific  reorganization  plan  that  if  after  the 
termination  of  the  voting  trust  the  holders  of  the  pre- 
ferred shares  should  fail  to  receive  the  full  dividend  for 
any  two  successive  quarterly  periods,  they  should  be  given 
the  right  to  elect  a  majority  of  the  directors.^"  In  the  re- 
organization of  the  Norfolk  and  Western,  the  interest  of 
the  preferred  shareholders  were  similarly  protected  when 
they  were  privileged  to  elect  two-thirds  of  the  directors 
during  five  years,  unless  before  the  expiration  of  that  pe- 
riod they  should  receive  three  full  yearly  dividends.''''* 

Results  of  Reorganizations. — i\rr.  William  M.  Acworth, 
the  English  authority  on  railroad  matters,  once  said: 

^T  Chronicle,  LXI,  1110.  ^'^>  Ibid.,  LXII.  551. 

68/6id.,  LXXV,  442,  612.  so /5id.,  LXII,  642. 

269 


RAILROAD  FINANCE 

A  very  competent  critic  has  declared  that  American  receivef* 
ships  reduce  to  manageable  limits,  while  English  reorganizations 
increase  still  further  the  previously  excessive  capitalization  of  a 
bankrupt  railroad.  Those  who  know  how  great  railway  sys- 
tems like  the  Atchison,  or  the  Denver  and  Rio  Grande,  or  the 
Northern  Pacific,  have  developed  their  capacity  for  public  serv- 
ice since  they  got  rid  of  their  receivers  and  started  afresh  with 
liabilities  which  their  income  enables  them  to  face  with  con- 
fidence, and  can  compare  this  state  of  things  with  that  prevail- 
ing on  numbers  of  small  English  railways,  which  are  piling  up 
year  after  year  a  load  of  debt  which  they  can  never  hope  to 
shake  off,  will  be  able  to  judge  whether  in  this  matter  the  ex- 
perience of  America  would  not  be  of  value  for  our  guidance  in 
England.61 

But  this  statement  of  the  case  is  too  favorable  to  Ameri- 
can practice.  It  is  true  that  reorganizations  have  greatly 
reduced  the  burden  of  fixed  charges,  but  this  has  been  ac- 
complished at  the  expense  of  an  increase  in  aggregate 
capitalization,  which  is  in  itself  an  evil.  From  a  table, 
which  was  published  in  1900,  it  appeared  that  Vv'hile  lines 
aggregating  over  35,000  miles,  had  reduced  their  fixed 
charges  twenty-nine  per  cent.,  they  had  increased  their 
total  capitalization  nearly  thirteen  per  cent.*^-  A  part  of 
this  increase  was  undoubtedly  justified  by  the  increased 
value  of  the  reorganized  property,  and  some  of  it  repre- 
sented the  legitimate  profits  of  syndicates,  but  much  of  it 
was  the  result  of  the  practice  of  giving  large  bonuses  of 
shares  to  facilitate  the  work  of  bringing  conflicting  inter- 
ests to  an  agreement.  While  this  method  of  inflation 
has  been  adopted  by  all  the  banking  houses  which  have 
been  concerned  with  the  reorganization  of  railroads,  its 
use  by  J.  P.  Morgan  and  company  has  been  most  exten- 
sive. In  his  testimony  before  the  United  States  industrial 
commission,  Mr.  Thomas  F,  Woodlock  condemned  the 
practice  of  issuing  such  shares.  "There  was  no  neces- 
sity," he  said,  "to  issue  all  that  stuff.     It  is  a  wrong  prin- 

*ii  Economic  Jour.,  IX,  69.  62  Poor's  Manual,  1900:  cvi. 

270 


REORGANIZATION 

ciple.  What  Mr.  Morgan  did  in  all  his  reorganization  was 
to  estimate  the  minimum  of  earning  capacity  and  take 
care  to  get  the  fixed  charges  down  to  that,  but  when  he 
came  to  charges  that  were  not  fixed,  or  to  securities  de- 
pendent on  future  prospects,  people  could  pretty  much 
help  themselves. ' '  *^" 

63  Report  of  the  industrial  commission,  IX,  450. 


CHAPTER  XV 

CONSOLIDATION 

Conveyances,  Leases,  and  Share-control. — Few  phases  of 
railroad  activity  have  been  so  prominently  and  so  contin- 
uously before  the  American  people  as  consolidation.  To 
shareholders  and  creditors  it  has  always  been  a  subject  of 
vital  importance  because  of  its  bearing  upon  the  security 
and  yield  of  investments;  to  cities  it  has  appeared  as  per- 
haps the  determining  factor  in  the  problem  of  differential 
rates;  and  to  shipping  interests  it  has  seemed  to  exert  the 
dominant  influence  in  establishing  the  absolute  level  of 
rates.  Yet  there  is  little  agreement  as  to  what  may  be 
properly  included  within  the  meaning  of  the  word.  In 
its  legal  sense  it  applies  only  to  those  combinations  in 
which  either  two  or  more  corporations  unite  in  an  entirely 
new  corporate  body,  or  one  corporation  absorbs  another 
without  itself  undergoing  any  organic  change.  But  we 
are  here  concerned  with  not  the  process  but  the  result; 
not  technical  but  actual  consolidation.  Therefore  it  is 
proper  to  use  the  term  in  reference  to  conveyances  and 
leases,  and  to  all  cases  in  which  share  ownership  gives 
control.  In  so  doing  we  are  only  adopting  the  usage 
which  the  courts,  inconsistently  enough,  have  established 
when  interpreting  statutes  forbidding  the  consolidation 
of  competing  lines. 

Union  of  Connecting  Lines. — There  has  been  from  an 
early  period  a  marked  tendency  toward  railroad  consoli- 
dation. It  was  inevitable  that  the  short  detached  lines, 
built  to  serve  local  needs,  should  be  extended  to  form 
connections  with  other  similar  lines  and  so  become  con- 
cerned in  the  handling  of  through  traffic.     In  some  cases, 

272 


CONSOLIDATION 

notably  the  constituent  lines  of  the  New  York  Central  and 
the  Boston  and  Albany,  construction  was  undertaken  with 
this  purpose  in  view;  in  others,  as  with  the  Eastern  and 
the  Boston  and  Maine,  the  crossing  of  state  lines  was  an 
incident  which  compelled  separate  incorporation.  In 
either  event,  consolidation  was  the  only  logical  outcome  of 
the  situation.  But  there  was  much  hostility  among  early 
railroad  managers,  and  this  spirit  was  often  fostered  by 
state  authorities  and  local  commercial  bodies.  So  sharp 
was  this  rivalry  that  in  some  instances  different  track 
gauges  were  adopted  in  the  attempt  to  subserve  the  in- 
terests of  particular  cities  by  hampering  the  growth  of 
interline  traffic.  Each  road  adopted  a  traffic  policy  of  its 
own,  fixed  its  own  rates  and  classifications,  avoided  traffic 
arrangements  with  other  companies,  and  stoutly  resisted 
all  attempts  to  bring  about  the  interchange  of  cars  and  the 
joint  use  of  tracks.^  It  was  at  length  discovered,  however, 
that  such  a  policy  prevented  the  railroads  from  perform- 
ing the  functions  for  which  they  were  projected  and  built, 
and  that  it  was  also  unprofitable  to  the  companies  them- 
selves. Shippers  desiring  to  send  freight  to  a  distant 
point  were  compelled  to  deal  with  several  different  car- 
riers, and  to  suffer  the  delay  and  loss  incident  to  the  trans- 
shipment of  goods  at  junction  points.  Passengers  were 
obliged  to  submit  to  frequent  transfers,  and  to  attend  per- 
sonally to  the  forwarding  of  baggage.  Yet  notwithstand- 
ing these  obstacles,  traffic  steadily  increased  until  it  be- 
came apparent  that  new  methods  and  more  adequate  facil- 
ities were  imperative.  The  amalgamation  of  connecting 
lines  was  the  response  to  this  demand.  With  the  removal 
of  artificial  restrictions,  business  expanded  rapidly,  and 
the  railroads  found  that  not  only  were  they  able  to  handle 
their  traffic  more  readily  but  to  do  so  at  much  less  ex- 

1  See  Bradbury,  "Railroad  Reminiscences,"  Me.  Hist.  Soc,  Collec- 
tions  (2  Ser.),  VII,  380-2. 

19  273 


RAILROAD  FINANCE 

pense.  The  result  was  larger  profits,  and  eventually, 
lower  rates. 

Some  Early  Consolidations. — The  consolidation  in  1853 
of  the  ten  short  lines  between  Buffalo  and  the  Hudson 
river  to  form  the  New  York  Central  was  the  most  notable 
instance  of  this  sort,  though  it  was  not  the  first.  As  early 
as  1838  the  Philadelphia,  Wilmington,  and  Baltimore,  the 
Wilmington  and  Susquehanna,  and  the  Baltimore  and 
Port  Deposit  railroads  were  united  to  form  a  through  line 
between  Philadelphia  and  Baltimore  under  the  name  of 
the  Philadelphia,  Wihuington,  and  Baltimore.-  In  1845 
the  Middleborough  railroad,  the  Fall  River  Branch  rail- 
road, and  the  Randolph  and  Bridgewater,  by  a  union  of 
share  capital,  were  consolidated  as  the  United  Corpora- 
tion, later  the  Fall  River  railroad.^  In  1854  the  Northern 
Central  railroad  was  formed  as  a  consolidation  of  the 
York  and  Maryland,  the  York  and  Cumberland,  and 
the  Susquehanna  railroads,  and  a  through  connection  un- 
der one  management  established  between  Baltimore  and 
Sunbviry.  In  the  West  the  Ohio  and  Pennsylvania,  the 
Ohio  and  Indiana,  and  the  Fort  Wayne  and  Chicago  were 
consolidated  as  the  Pittsburgh,  Fort  Wayne,  and  Chicago 
in  1856;  and  the  same  year  the  Chicago  and  Aurora  and 
the  Central  IMilitary  Tract  railroads  were  united  in  the 
Chicago,  Burlington,  and  Quincy. 

Popular  Opposition. — Such  changes  were  seldom  ef- 
fected without  opposition  from  either  some  of  the  parties 
in  interest  or  the  public.  Even  after  the  movement  to- 
ward consolidation  had  got  well  under  way,  there  was  a 
tendency  to  limit  a  railroad's  activities  to  the  state  in 
which  it  had  received  its  charter.  Thus  the  Bellefontaine 
and  Indiana  in  Ohio  and  the  Indianapolis,  Pittsburgh,  and 
Cleveland  in  Indiana  were  constructed  as  sections  of  a 
through  line,  but  for  a  time  after  their  completion  they 

•^  L.  Md.,  1837-8,  c.  30.  3  "Hist,  of  the  Old  Colony,"  48. 

274 


CONSOLIDATION 

were  operated  separately.  In  1856  the  need  for  a  closer 
relationship  became  imperative,  but  no  attempt  was  made 
to  form  an  interstate  corporation  to  take  over  the  proper- 
ties of  these  companies.  Instead,  an  agreement  was  en- 
tered into  for  the  operation  of  the  two  lines  by  an  execu- 
tive committee  representing  both  boards  of  directors,  and 
this  arrangement  was  continued  until  1864  when  the  com- 
panies were  finally  consolidated. •*  This  is  evidence  of  the 
survival  of  that  narrow  spirit  of  interstate  rivalry  which 
had  located  the  eastern  terminus  of  the  New  York  and 
Erie  at  Piermont  in  order  to  prevent  New  Jersey  from  de- 
riving any  benefit  from  the  road,  and  which  at  a  later 
period  caused  Pennsylvania  to  take  advantage  of  its  juris- 
diction over  a  section  of  the  shore  of  Lake  Erie  to  hinder 
the  westward  extension  of  the  railroads  of  New  York.  In 
New  Jersey  a  tax  was  imposed  upon  all  passengers  cross- 
ing the  state,  and  the  courts  approved  the  practice.  While 
there  had  been  considerable  overlapping  of  state  bound- 
aries prior  to  the  Civil  war,  there  was  constant  difficulty 
between  connecting  lines,  and  also  between  railroad  offi- 
cials and  state  authorities,  over  the  matter  of  through 
traffic. 

Period  of  Trunk  Line  Development. — But  it  was  only 
after  the  difficulty  experienced  by  the  federal  government 
in  obtaining  continuous  transportation  of  troops  and  mili- 
tary supplies  that  congress  could  be  induced  to  exercise 
its  constitutional  authority  in  the  matter.  In  1866  a  law 
was  passed  which  granted  to  every  railroad  the  right  to 
carry  persons  and  property  from  any  state  into  another 
state,  "and  to  connect  with  roads  of  other  States  so  as  to 
form  continuous  lines  ...  to  the  place  of  destina- 
tion" unhampered  by  state  laws.^  This  law  had  an  un- 
doubted influence  in  ushering  in  the  period  of  trunk  line 

4  Vernon,  Amer.  Railroad  Manual,  1873:  420. 
6  Stat,  at  large,  XIV,  6(5. 

275 


RAILROAD  FINANCE 

development  which  followed.  The  immediate  cause  was 
the  increasing  rivalry  for  through  traffic  between  the 
Pennsylvania,  the  Erie,  and  the  New  York  Central.  It 
had  been  the  policy  of  the  Pennsylvania  to  encourage  the 
building  of  western  connections,  but  to  exert  only  such 
control  over  their  management  as  was  necessary  to  insure 
harmonious  relations.  In  1868  this  was  abandoned  upon 
the  discovery  of  a  well-laid  plan  by  which  the  Erie  was 
attempting  to  absorb  the  Pittsburgh,  Fort  Wayne,  and 
Chicago  and  other  important  western  connections,  and 
steps  w^ere  taken  to  lease  these  lines  and  so  create  a  sys- 
tem strong  enough  to  withstand  the  onslaughts  of  com- 
petitors.® The  Columbus,  Chicago,  and  Indiana  Central 
was  leased  in  1869'  by  the  Pittsburgh,  Cincinnati,  and  St. 
Louis  in  the  interest  of  the  Pennsylvania,  which  thereby 
gained  control  of  a  through  line  to  St.  Louis  and  Chicago. 
Another  and  more  direct  route  to  Chicago  was  obtained 
within  the  year  through  the  lease  of  the  Pittsburgh,  Fort 
Wayne,  and  Chicago;  and  in  1872  a  second  route  to  St. 
Louis  was  acquired  through  the  lease  of  the  St.  Louis, 
Vandalia,  and  Terre  Haute  by  the  Terre  Haute  and  In- 
dianapolis, in  which  the  Pennsylvania  had  a  half  interest. 
In  1869,  also,  Cornelius  Vanderbilt  united  the  several 
lines  connecting  Buffalo  with  Chicago  in  the  Lake  Shore 
and  Michigan  Southern  railroad,  and  consolidated  the  New 
York  Central  with  the  Pludson  River  railroad,  thus  es- 
tablishing under  his  control,  but  under  two  separate  or- 
ganizations, a  through  route  from  New  York  to  Chicago. 
The  Baltimore  and  Ohio  in  1866  leased  the  Central  Ohio, 
and  in  1869,  the  Sandusky,  IMansfield,  and  Newark,  and 
constructed  the  Baltimore,  Pittsburgh,  and  Chicago  ex- 
tension through  to  Chicago  by  1874.  The  Erie  took  over 
the  Atlantic  and  Great  Western  under  various  leases  be- 
tween 1868  and  1874,  thus  extending  its  control  as  far 

6  Annual  report,  1871. 

276 


CONSOLIDATION 

west  as  Dayton,  but  it  did  not  secure  an  independent  en- 
trance into  Chicago  until  1883,  when  the  Chicago  and 
Atlantic  was  opened. 

On  a  smaller  scale  similar  changes  were  effected  through- 
out the  country,  and  systems  were  built  up  by  a  process  of 
amalgamation  of  branch  lines  and  extensions.  For  while 
the  movement  had  been  inaugurated  with  a  view  to  facili- 
tating transportation,  the  systems  thus  created  soon  found 
a  much  stronger  motive  to  consolidation  in  the  suppression 
of  competition.  Notwithstanding  statutory  prohibitions, 
the  consolidation  of  competing  railroads,  whether  parallel 
or  otherwise,  has  gone  on,  in  some  eases  by  the  aid  of 
devices  to  evade  the  law,  in  others  by  virtue  of  special 
legislative  permission.  The  New  York,  New  Haven,  and 
Hartford  may  be  mentioned  as  a  system  which  has  been 
built  up  through  the  consolidation  of  lines  many  of  which 
were  natural  competitors.  The  New  York  Central  in  1885 
found  it  necessary  to  get  control  of  the  West  Shore  and 
thus  remove  a  competitor  which  paralleled  its  main  line; 
and  the  Lake  Shore,  for  the  same  reason,  in  1887  took 
over  the  New  York,  Chicago,  and  St.  Louis,  which  paral- 
leled its  line  throughout  its  entire  length. 

Effect  of  Sherman  Anti-trust  Act. — The  interstate  com- 
merce act  of  1887  which  prohibited  "pooling,"  or  the  ap- 
portionment of  competitive  business  or  the  proceeds 
thereof,  had  no  marked  effect  upon  the  progress  of  con- 
solidation, for  the  traffic  associations  which  were  imme- 
diately organized  to  insure  the  maintenance  of  rates  made 
this  prohibition  ineffective.  But  in  1897  the  United  States 
supreme  court  decided  in  the  Trans-Missouri  freight  asso- 
ciation case ''  that  whether  reasonable  or  not,  such  agree- 
ments were  in  violation  of  the  so-called  "Sherman  anti- 
trust act,"  which  was  passed  by  congress  in  1890  in  an 
attempt  "to  protect  trade  and  commerce  against  unlawful 

T  16G  U.  S.,  290. 

277 


RAILROAD  FINANCE 

restraints  and  monopolies, ' '  ^  and  without  thought  of  its 
possible  application  to  railroads.  This  judgment  was  re- 
affirmed in  1898  in  the  joint  traffic  association  case,  and 
the  constitutionality  of  the  act  itself  was  established.^ 

Community  of  Interest. — These  decisions  made  neces- 
sary the  devising  of  a  method  by  means  of  which  the  sta- 
bility of  rates  might  be  maintained  without  doing  violence 
to  the  law.  To  this  end  the  idea  of  a  "community  of  in- 
terest" was  proposed  in  1899  by  President  Cassatt  of  the 
Pennsylvania,  and  put  in  practice  after  it  had  been  ap- 
proved by  the  Vanderbilt  interests.  This  involved  the 
ownership  of  shares  of  rival  lines  in  sufficient  amounts  to 
obtain  representation  upon  their  boards  of  directors,  and 
so  maintain  harmony  of  policy  among  the  various  inter- 
ests. With  this  in  view,  the  New  York  Central  and  the 
Cleveland,  Cincinnati,  Chicago,  and  St.  Louis  in  1900 
made  large  purchases  of  the  shares  of  the  Chesapeake  and 
Ohio,  which  had  long  been  a  disturber  of  rate  schedules. 
The  Pennsylvania,  together  with  the  Northern  Central, 
also  bought  heavily  of  these  shares.  In  the  aggregate  the 
Vanderbilt-Pennsylvania  holdings  amounted  to  less  than 
a  majority,  but  they  were  sufficient  to  elect  two-thirds  of 
the  directors.  The  Pennsylvania,  itself  and  through  the 
subsidiary  Pennsylvania  company,  the  Northern  Central, 
and  the  Philadelphia,  Baltimore,  and  "Washington,  in  the 
same  manner  obtained  practical  working  control  of  the 
other  important  soft  coal  roads — the  Baltimore  and  Ohio, 
and  the  Norfolk  and  Western.  By  this  means,  such  rela- 
tions were  established  with  these  properties  as  in  a  meas- 
ure to  put  an  end  to  the  practice  of  rate-cutting.  The 
result  was  therefore  the  same  as  had  been  formerly  at- 
tained through  traffic  associations,  but  it  was  now  brought 
about  without  the  necessity  for  agreements.     This  process 

8  Stat,  at  large,  XXVI,  209. 

9  171  U.  S.,  505.  But  see  Standard  Oil  v.  United  States,  221  U. 
S.,  1.     ,(1910.) 

278 


CONSOLIDATION 

has  gone  on  continuously  until  practically  all  the  railroads 
in  what  is  known  as  "trunk  line"  territory  have  been 
affiliated  through  the  interchange  of  directors.  Thus  the 
New  York  Central-  is  represented  upon  the  directorates  of 
the  Erie,  the  Delaware,  Lackawanna,  and  Western,  the 
Delaware  and  Hudson,  the  New  York,  Ontario,  and  West- 
ern, the  New  York,  New  Haven,  and  Hartford,  the  Lehigh 
Valley,  and  the  Reading.  Through  the  Lake  Shore  it 
holds  joint  control  with  the  Baltimore  and  Ohio  of  the 
Reading,  which  in  turn  controls  the  Central  of  New  Jer- 
sey. The  Vanderbilt  interest  has  long  been  dominant  in 
the  Chicago  and  North  Western,  and  in  New  England  it 
has  not  only  the  lease  of  the  Boston  and  Albany,  but 
through  the  American  Express  company  it  has  some  voice 
in  the  management  of  the  Boston  and  Maine.  The  Union 
Pacific  is  the  center  of  another  important  community  of 
interest.  Four  Union  Pacific  directors  are  also  members 
of  the  board  of  the  Chicago  and  North  Western,  and  two 
are  in  the  Chicago,  Milwaukee,  and  St.  Paul.  In  1905 
two  Union  Pacific  representatives  were  elected  to  the  di- 
rectorate of  the  Atchison.  For  a  short  time  prior  to  1905, 
E.  H,  Harriman  was  a  director  of  the  Denver  and  Rio 
Grande  and  George  J.  Gould  was  a  director  of  the  Union 
Pacific;  but  this  arrangement  was  abruptly  ended  when 
the  Gould  interest  began  the  construction  of  an  independ- 
ent outlet  to  the  Pacific.  This  will  serve  to  illustrate  the 
limitations  of  community  of  interest.  Moreover,  with  the 
adoption  of  this  principle,  it  appears  that  the  practice  of 
transacting  all  important  business  through  an  executive 
committee  became  more  general,  and  to  this  committee 
were  appointed  few  if  any  "community  of  interest  di- 
rectors." 

The  Seven  Great  Financial  Interests. — By  aid  of  such 
methods,  supplementing  the  actual  consolidation  which  has 
been  going  on  all  the  time,  most  of  the  railroad  mileage  of 

279 


RAILROAD  FINANCE 

the  country  has  been  brought  into  the  control,  but  not  the 
ownership,  of  seven  great  financial  interests  represented 
by  J.  P.  Morgan,  J.  J.  Hill,  Jacob  Sehiff,  W.  K.  Vander- 
bilt,  George  J.  Gould,  W.  H.  and  J.  H.  Moore,  and  the 
impersonal  Pennsylvania  railroad,  the  largest  share- 
holder of  which  is  H.  C.  Frick.  Behind  Vanderbilt 
are  J.  P.  Morgan  and  company,  and  the  First  Na- 
tional bank  of  New  York,  which  is  affiliated  with  the  house 
of  Morgan;  and  the  same  institutions,  together  with  the 
Barings,  are  identified  with  the  Hill  enterprises.  With 
Sehiff  are  Kuhn,  Loeb,  and  company,  representing  strong 
financial  interests  in  Germany,  and  the  National  City 
bank  of  New  York,  dominated  by  Standard  Oil  interests; 
and  with  the  Moores  are  the  First  National  bank,  and 
Speyer  and  company,  closely  affiliated  with  great  banking 
houses  in  England  and  Germany.  The  Goulds  have 
been  without  important  banking  affiliations;  but  in 
1908  relations  were  established  with  Kuhn,  Loeb, 
and  company.  The  Kuhn,  Loeb  influence  has  since 
become  strong  enough  to  threaten  to  force  the  Gould  in- 
terest from  its  dominant  position.  This  banking  house 
has  also  a  large  minority  interest  in  the  Rock  Island. 
There  is  much  Rockefeller  capital  represented  in  the  Mis- 
souri Pacific  and  the  Denver  and  Rio  Grande.  It  cannot 
be  said,  however,  that  the  Standard  Oil  capitalists  are 
identified  with  any  single  railroad  interest.  Undoubt- 
edly their  closest  affiliation  is  with  the  Union  Pacific  in- 
terests, but  the  Rockefellers  are  heavily  interested  in  the 
Chicago,  Milwaukee,  and  St.  Paul,  which  is  an  independ- 
ent property;  and  upon  the  board  of  the  New  York  Cen- 
tral are  James  Stillman  and  William  Rockefeller,  while 
William  Rockefeller  and  C.  M.  Pratt  are  directors  of  the 
New  York,  New  Haven,  and  Hartford,  control  of  which  is 
widely  scattered." 

10  This  subject  is  also  discussed  in  Keys,  "Overlords  of  Railroad 

280 


CONSOLIDATION 

Several  attempts  have  been  made  to  present  in  tabular 
form  statements  showing  the  concentration  of  railroad 
control,  and  at  the  same  time  to  group  the  lines  tributary 
to  a  single  interest.  The  problem  is  complicated  by  cases 
of  joint  control,  and  of  personal  as  distinguished  from 
corporate  control,  and  also  by  the  uncertainty  as  to  what 
is  required  to  constitute  control. ^^     Furthermore,  changes 

Traffic,"  World's  Work,  XIII,  8437-45,  and  "The  Shifting  Railroad 
Control,"  Ibid.,  XX,  13045-56;  Edwards,  "Men  Behind  the  Rail- 
roads," Booklovers'  Mag.,  I,  335-42;  and  Tittman,  "Masters  of  Our 
Railways,"  National  Mag.,  XXII,  65-82. 

11  According  to  the  interstate  commerce  commission  "Control  of 
or  over  a  corporation  means  ability  to  determine  the  action  of  that 
corporation."  It  recognizes  the  distinction  between  personal  and 
corporate  control,  and  classifies  the  latter  as  follows: 

"  ( a )  Right  to  possess  all  the  property  of  the  corporation,  except 
its  instrumentalities  of  organization. 

"(b)  Right  to  possess  all  the  property  of  the  corporation  except 
its  instrumentalities  of  organization,  its  money,  and  its  choses  in 
action. 

"(c)  Right  to  possess  such  portion  of  the  tangible  property  of  the 
corporation  as  is  capable  of  being  employed  in  discharging  the  du- 
ties of  a  common  carrier.  The  principal  form  of  control  contem- 
plated under  this  class,  as  well  as  under  class  (b),  is  the  control 
effected  througli  lease,  class  (b)  differing  from  class  (c)  only  in  the 
extent  of  tlie  property  and  interests  covered  by  the  contract.  It 
has  been  urged  by  many  of  the  carriers  that  a  lease  of  the  tangible 
property  of  a  corporation  does  not  constitute  control  of  the  corpo- 
ration; that  it  merely  gives  possession  of  certain  pliysical  property 
and  in  no  way  interferes  in  the  management  of  the  corporation 
itself.  This  contention  has  some  merit;  but  .  .  .  the  provi- 
sions of  lease  contracts  vary  .  .  .  widelj^  in  the  extent  to  which 
they  allow  participation  in  the  affairs  of  the  lessor  corporation, 
and  .  .  .  even  the  most  simple  forms  of  lease  agreement  are 
likely  to  bring  about,  either  directly  or  indirectly,  a  very  consider- 
able degree  of  control. 

"(d)  Right  to  exercise  the  major  part  of  the  voting  power  at- 
tached to  the  shares  of  stock  and  other  securities  of  the  corporation. 

"(e)  Riglit  to  name  the  major  part  of  the  board  of  directors  of 
the  corporation,  whether  by  virtue  of  voting  trust  agreement  or  by 
virtue  of  title  to  securities  or  otherwise. 

"(f)  Right  to  foreclose  a  first  lien  upon  all  the  property  of  the 
corporation. 

"(g)  Right  to  foreclose  a  first  lien  upon  a  major  part  of  the 
property  of  the  corporation. 

"Forms   (f)   and    (g)   constitute  control     .     .     .     only  in  case  the 

281 


RAILROAD  FINANCE 

of  relationship  are  constantly  occurring,  so  the  result  is 
always  of  uncertain  and  transient  value. 

Community  of  interest,  involving  as  it  does  the  inter- 
change of  directors,  would,  if  logically  carried  out,  result 
in  an  arrangement  whereby  each  railroad  would  have  a 
representative  upon  the  directorate  'of  every  other  rail- 
road which  might  compete  with  it.  This  has  not  been 
done,  but  what  has  been  accomplished  is  to  group  the 
railroad  properties  of  the  country  so  that  certain  interests 
have  been  allowed  by  the  logic  of  circumstance  to  acquire 
a  dominant  position  over  contiguous  lines  in  a  given 
roughly  defined  territory.  Thus  the  Pennsylvania-Van- 
derbilt  interest  dominates  the  trunk  lines.  In  the  South 
the  Morgan  interest,  with  the  Southern  and  the  ]\Iobile 
and  Ohio,  and  the  Walters-Jenkins  interest,  with  the  At- 
lantic Coast  Line,  the  Louisville  and  Nashville,  and  the 
Nashville,  Chattanooga,  and  St.  Louis,  are  able  to  control 
the  situation.  Jointly,  they  control  the  Chicago,  Indian- 
apolis, and  Louisville,  and  so  have  an  outlet  to  Chicago. 
The  Goulds  largely  control  the  Southwestern  territory; 
and  in  the  Northwest  the  Hill-Morgan  interest  is  dom- 
inant. The  Union  Pacific  interest  controls  transportation 
matters  affecting  the  Pacific  Coast  south  of  Puget  Sound. 
But  no  sharp  line  can  be  drawn  between  these  groups,  for 
there  is  always  a  tendency  toward  the  extension  of  con- 
trol. E.  H.  Harriman  reached  out  for  a  terminal  at  Seat- 
tle, and  acquired  working  control  of  the  Illinois  Central 
and  the  Central  of  Georgia,  thus  breaking  into  two  widely 

securities  which  constitute  the  lien  have  matured,  or  the  interest 
upon  such  securities  has  been  defaulted,  and  the  right  to  foreclose 
such  lien  has  not  yet  been  exercised. 

"(h)  Right  to  determine  the  action  of  the  corporation  in  a  spe- 
cific respect  or  respects. 

"This  last  class  is  intended  to  cover  any  peculiar  forms  of  con- 
trol not  included  in  the  other  classes.  Under  this  class  would  fall 
control  through  advances  for  construction  purposes  .  .  ."  "In- 
tercorporate relationships  of  railways,"   15-6. 

282 


CONSOLIDATION 

separated  groups,  and  establishing  a  through  line  by  a 
roundabout  route  between  Seattle,  San  Francisco,  and 
Savannah.  And  the  Goulds  entered  Pittsburgh  with  the 
Wabash,  and  took  over  the  Western  Maryland  in  an  un- 
successful attempt  to  extend  to  the  Atlantic.  They  also 
invaded  San  Francisco  with  the  Western  Pacific.  The 
Chicago,  Milwaukee,  and  St.  Paul,  long  a  "granger"  road, 
has  extended  its  activities  and  entered  the  Hill  territory 
and  established  a  terminal  on  Puget  Sound.  The  Burling- 
ton has  also  extended  the  Hill  influence  to  the  Gulf  coast 
through  the  purchase  of  the  Colorado  Southern.  The 
Rock  Island,  another  "granger"  line  originally,  has 
within  recent  years  expanded  into  a  great  system  disput- 
ing with  the  Gould  lines  the  mastery  of  the  Southwest.  A 
still  more  recent  creation  is  the  ' '  Hawley  system, ' '  compris- 
ing the  Chesapeake  and  Ohio,  the  Hocking  Valley,  the 
Chicago,  Cincinnati,  and  Louisville,  the  Toledo,  St.  Louis, 
and  Western,  the  Chicago  and  Alton,  the  Minneapolis 
and  St.  Louis,  the  Iowa  Central,  and  the  Missouri,  Kan- 
sas, and  Texas.  With  these  lines  is  affiliated  B.  F. 
Yoakum  and  the  St.  Louis  and  San  Francisco  and  the 
Chicago  and  Eastern  Illinois. 

Huntington's  Flan  for  a  Single  Company. — Collis  P. 
Huntington  possessed  advanced  ideas  upon  the  subject  of 
consolidation.  While  testifying  before  the  Pacific  railway 
commission  in  1887,  he  said:  "It  has  been  my  view  for  a 
good  many  years  that  there  ought  not  to  be  more  than 
three  or  four  transportation  companies  in  the  United 
States.  ...  In  fact,  it  would  be  better,  I  think,  if 
there  was  but  one.  ...  It  would  serve  the  people  a 
great  deal  better,  and  do  business  cheaper.  "^^  Later  he 
was  careful  to  explain  that  he  did  not  "mean  a  trust,  or 
anything  like  that,  but  a  concentration  of  ownership   of 

12  Testimony  taken  by  the  U.  S.  Pacific  railway  commission,  I,  40. 

283 


RAILROAD  FINANCE 

railroad  properties. "  ^^     Writing  at  length  upon  this  sub- 
ject in  1891,  he  said: 

I  am  satisfied  that  the  best  results  will  not  be  reached  until 
substantially  all  the  transportation  business  of  this  country  is 
done  by  one  company.  ,  .  .  What  is  wanted  is  not  more  than 
two  or  three — and  one  would  be  better — great  carrying  com- 
panies. .  .  .  With  the  best  talent  in  the  country  to  manage 
and  control  such  an  organization,  many  millions  could  be  saved 
to  those  who  use  the  railroads  of  the  country,  and  millions  also 
to  those  who  own  them  over  what  is  now  being  received  by  the 
fragmentary,  badly-equipped,  and  inefficiently-managed  roads 
that,  with  but  few  exceptions  now  exist.i* 

This  has  been  often  quoted,  and  not  infrequently  dis- 
torted into  a  positive  prediction;  but  accepting  it  as  such, 
it  is  in  line  with  a  tendency  which  has  long  been  operative, 
and  at  no  period  to  such  an  extent  as  in  the  last  decade. 
Progress  of  Consolidation  in  New  England. — The  rail- 
road situation  in  New  England,  now  and  in  the  early  sev- 
enties is  worthy  of  comparative  study  in  this  connection, 
as  it  affords  an  illustration  of  the  extent  to  which  the 
process  of  centralization  has  been  carried  in  that  section, 
and  also  an  indication  of  a  like  change  which  may  be 
expected  to  take  place  throughout  the  country.  In  1873 
there  were  sixteen  independent  operating  companies  in 
New  England  which  controlled  a  hundred  miles  each. 
They  ranked  as  follows: 

Miles 
Central  Vermont  (Omitting  159  in  N.  Y.  and 

69  in  Canada)    548 

Maine   Central    357 

Boston  and  Albany  (Omitting  56  in  N.  Y.)   .   212 
Eastern    266 

^^  Railway  and  Corp.  Law  Jour.,  IX,  21. 

14  Huntington,  "Plea  for  Railway  Consolidation,"  Aorth  Amer. 
Rev.,  CLIII,  277-9;  see  also  Lewis,  "National  Consolidation  of  the 
Railways  of  the  U.  S."     (1893.) 

284 


CONSOLIDATION 

Old    Colony    245 

New  York  and  New  England   205 

European    and    North    American    (Omitting 

88  in  Canada)    114 

Boston  and  Maine   189 

Atlantic  and  St.  Lawrence  (Grand  Trunk  of 

Canada,   lessee)     149 

Boston,  Concord,  and  Montreal   145 

Connecticut   and  Passumpsic   Rivers    (Omit- 
ting 33  in  Canada)    110 

New  York,  New  Haven,  and  Hartford 140 

Hartford,  Providence,  and  Fishkill  129 

Housatonic    128 

Concord    112 

New   Haven  and  Northampton    109 


Total     3158 

At  that  time  there  were  in  New  England  5088  miles  of 
railroad;  so  these  sixteen  companies  operated  sixty-two 
per  cent,  of  the  total.  The  total  mileage  has  since  in- 
creased to  about  7800,  of  which  the  Boston  and  Maine 
and  the  New  York,  New  Haven,  and  Hartford  together 
operate  or  control  5900  miles,  or  seventy-five  per  cent. 
The  Central  Vermont  and  the  Atlantic  and  St,  Lawrence 
are  controlled  by  the  Grand  Trunk  of  Canada.  The  line 
of  the  Canadian  Pacific  extends  across  the  northern  ex- 
tremity of  Maine;  and  the  Bangor  and  Aroostook  retains 
its  independence.  For  some  years  the  New  York  Central 
owned  a  majority  interest  in  the  Rutland.  It  also  con- 
trolled the  Boston  and  Albany  under  a  lease.  The  New 
York,  New  Haven,  and  Hartford  in  1911  bought  half  of 
the  New  York  Central's  shares  in  the  Rutland,  and  as- 
sumed half  the  burden  of  the  Boston  and  Albany  lease. 
All  other  railroads  of  any  importance  in  these  six  states 

285 


RAILROAD  FINANCE 

are  directly  controlled  by  either  the  Boston  and  Maine, 
or  the  New  York,  New  Haven,  and  Hartford,  which  in 
turn  controls  the  Boston  and  Maine.  The  Boston  and 
IVfaine  system  now  represents  126  original  railroad  cor- 
porations; the  New  Haven,  130.  Not  only  that,  but  the 
New  Haven  system  controls  practically  all  the  local  and 
interurban  traction  systems  in  Rhode  Island  and  Connecti- 
cut, and  nine  steamship  lines  between  various  New  Eng- 
land ports  and  New  York,  with  a  half  interest  in  another 
line  operating  between  Boston  and  Savannah  and  inter- 
mediate ports.  The  Boston  and  Maine  owns  or  controls 
forty-five  miles  of  electric  lines  in  New  Hampshire,  and  it 
has  made  several  unsuccessful  attempts  to  obtain  legisla- 
tive permission  to  acquire  electric  railroad  properties  in 
Massachusetts. 

Similar  Tendency  Throughout  the  Country. — ^Until  after 
the  Civil  war  no  railroad  attained  the  length  of  a  thousand 
miles.  The  longest  road  in  the  fifties  was  the  Illinois  Cen- 
tral, with  something  over  700  miles.  In  1867  the  Chicago 
and  North  Western  passed  the  thousand  mark.  Two  years 
later  it  was  operating  1257  miles ;  the  Illinois  Central,  966 ; 
the  Milwaukee  and  St.  Paul,  938;  the  Erie,  774;  and  the 
New  York  Central,  692.  With  the  consolidations  of  that 
year,  the  Pennsylvania  increased  its  mileage  to  3261,  the 
Erie  to  1412,  the  Chicago  and  North  Western  to  1282, 
and  the  Milwaukee  and  St.  Paul  to  1119.  These  four 
roads,  each  of  which  in  1870  had  a  mileage  in  excess  of 
1000,  constituted  about  fifteen  per  cent,  of  the  mileage  of 
the  whole  country.  The  interstate  commerce  commission 
in  its  report  on  the  statistics  of  railways  for  1906  pointed 
out  the  fact  that  fifty  companies  operating  a  thousand 
or  more  miles  controlled  sixty-five  per  cent,  of  tlie  total 
railroad  mileage. 

Three  large  interests  are  already  in  control  of  over  20,- 
000  miles  each,  and  three  others  dominate  systems  of  over 

286 


CONSOLIDATION 

10,000  miles.  The  Union  Pacific,  itself  operating  6000 
miles,  controls  the  Southern  Pacific,  the  San  Pedro,  Los 
Angeles,  and  Salt  Lake,  the  Illinois  Central,  the  Central  of 
Georgia,  and  other  lines — a  system  aggregating  over  25,- 
000  miles.  The  Union  Pacific  interest  is  also  the  holder 
of  large  shares  in  the  Atchison,  the  Baltimore  and  Ohio, 
the  Erie,  the  Chicago,  Milwaukee,  and  St.  Paul,  the  Chi- 
cago and  North  Western,  and  the  New  York  Central.  The 
New  York  Central  system  comprises  13,000  miles,  and  the 
Chicago  and  North  Western,  9500  miles.  Altogether,  the 
Vanderbilts  dominate  23,000  miles.  The  Great  Northern, 
the  Northern  Pacific,  the  Chicago,  Burlington,  and  Quincy, 
and  the  Colorado  and  Southern,  comprising  the  Hill  group, 
control  an  aggregate  mileage  of  nearly  25,000.  The  Gould 
system  comprises  19,000  miles.  Owning  only  about  500 
miles  in  fee,  the  Pennsylvania  operates  about  4000,  and 
controls  a  sy.stem  of  11,000  miles,  besides  having  an  active 
voice  in  the  management  of  several  properties  which  it 
does  not  control.  In  the  South  the  Atlantic  Coast  Line 
system  aggregates  11,000  miles,  and  the  Southern  about 
9500  miles. 

Motives  for  Consolidation. — Railroad  consolidation  has 
been  undertaken  from  various  motives;  to  facilitate 
communication,  to  prevent  or  to  remove  competition,  to 
profit  from  the  sale  of  new  securities,  and  to  simplify 
organization.  While  the  object  of  the  earliest  com- 
binations was  to  promote  efficiency  of  operation,  it  soon 
developed  into  the  desire  to  develop  and  retain  new  busi- 
ness. This  necessitated  the  extension  of  control  over 
through  lines  to  strategic  points;  for  without  the  advan- 
tage of  situation  a  company  would  be  unable  to  deal  favor- 
ably with  rival  carriers  in  the  matter  of  fixing  and  main- 
taining rates,  or  to  protect  itself  in  the  event  of  rate  wars. 
The  Southern  Pacific  profited  in  this  respect  from  its 
acquisition  of  Morgan's  Louisiana  and  Texas  Railroad  and 

287 


RAILROAD  FINANCE 

Steamship  line;  for  possessing  the  only  through  route  un- 
der a  single  management  from  New  York  to  San  Fran- 
cisco, it  was  for  years  able  to  dominate  the  transcontinen- 
tal rate  situation.  The  end  frequently  sought  is  an  inde- 
pendent entrance  into  a  large  city.  Thus  it  was  for  ita 
valuable  terminal  properties  that  the  New  York  and  Har- 
lem was  taken  over  by  the  New  York  Central  in  1873. 
Instances  such  as  this  could  be  cited  at  length.  The  Penn- 
sylvania in  1871  leased  the  United  Railroads  of  New  Jer- 
sey on  terms  which  the  directors  admitted  were  ' '  onerous, ' ' 
in  order  to  obtain  a  direct  route  between  Philadelphia  and 
New  York.  For  the  same  reason  the  Delaware,  Lacka- 
wanna, and  Western  in  1868  leased  the  Morris  and  Essex, 
running  into  Hoboken;  and  the  Reading  in  1901  acquired 
control  of  the  Central  of  New  Jersey,  with  valuable  ter- 
minals in  Jersey  City.  To  reach  Chicago  the  Northern 
Pacific,  under  the  Villard  regime,  leased  the  Wisconsin 
Central;  and  with  the  same  object  in  view  the  Northern 
Pacific  and  the  Great  Northern  in  1901  jointly  acquired 
control  of  the  Chicago,  Burlington,  and  Quincy.  The 
Atchison  took  over  the  San  Francisco  and  San  Joaquin 
Valley  in  1899  for  its  terminal  properties  on  San  Fran- 
cisco bay.  For  a  similar  reason  the  Goulds  in  1902  pur- 
chased control  of  the  Western  Maryland,  with  valuable 
harbor  facilities  at  Baltimore.  It  should  be  understood 
that  not  all  the  lines  acquired  for  this  reason  have  been 
comparatively  small.  The  Burlington  has  a  greater 
mileage  than  either  the  Great  Northern  or  the  Northern 
Pacific,  and  nearly  as  much  as  both  combined.  The  Union 
Pacific,  operating  5000  miles,  in  order  to  acquire  an  out- 
let to  San  Francisco  by  means  of  the  Central  Pacific,  in 
1901  purchased  control  of  the  entire  Southern  Pacific  sys- 
tem of  over  8000  miles.  With  the  development  of  a  science 
of  railroad  economics,  administrative  efficiency  no  longer 
serves  as  a  motive  of  consolidation.     Furthermore,  it  is 

2SS 


CONSOLIDATION 

pointed  out  by  Doctor  W.  Z.  Ripley  that  since  about  1890 
the  tendency  has  been  toward  operation  in  smaller  divi- 
sions with  the  view  to  higher  efficiency;  also  that  with  the 
single  exception  of  the  Harriman  lines,  none  of  the  recent 
combinations  have  attempted  to  interfere  with  the  traffic 
organizations  of  constituent  lines. ^^ 

Restraint  of  competition  was  early  sought  as  an  object 
of  consolidation.  This  at  first  took  the  form  of  extending 
accommodations  to  connecting  lines  in  order  to  remove  the 
inducements  to  the  construction  of  rival  roads.  The  next 
step  was  the  elimination  of  competition  in  the  same  terri- 
tory. It  was  with  this  purpose  in  view  that  Cornelius 
Vanderbilt  in  1867  made  his  unsuccessful  attempt  to  get 
control  of  the  Erie,  and  subsequently  acquired  both  the 
West  Shore  and  the  "Nickle  Plate."  The  New  Jersey 
railroad,  operating  between  Jersey  City  and  New  Bruns- 
wick in  competition  with  the  Camden  and  Amboy,  was  in 
1867  taken  over  as  a  constituent  in  the  United  Railroads 
of  New  Jersey.  The  merger  of  the  Galena  and  Chicago 
Union  ^nd  the  Chicago  and  Milwaukee  in  the  Chicago  and 
North  Western  in  1865  was  undertaken  for  the  purpose  of 
eliminating  competition.  In  1895  the  New  York,  New 
Haven,  and  Hartford  took  advantage  of  the  embarrassment 
of  its  rival,  the  New  York  and  New  England,  and  pur- 
chased control  of  that  company.  The  Union  Pacific  in 
1903  acquired  a  dominant  interest  in  the  San  Pedro,  Los 
Angeles,  and  Salt  Lake  to  prevent  the  invasion  of  a  terri- 
tory which  it  regarded  as  peculiarly  its  own. 

Speculative  Gains. — Those  forms  of  consolidation  which 
involve  the  issue  of  new  securities  afford  an  opportunity 
for  inflation  which  has  been  seldom  overlooked.  This 
adds  a  speculative  motive  to  consolidation,  but  it  is  often 
impossible  to  determine  the  importance  of  this  motive  even 
in  a  particular  case.     The  New  York  Central  consolida- 

li  Report  of  the  industrial  commiasion,  XIX,  309,  328. 

20  289 


RAILROAD  FINANCE 

tion  of  1853  resulted  in  a  large  issue  of  inflated  shares,  but 
however  much  the  prospect  of  speculative  gain  may  have 
aided  the  work  of  the  promoters  in  bringing  the  various 
interested  parties  into  the  agreement,  it  is  certain  that  the 
change  was  effected  for  commercial  and  not  financial 
reasons.  The  closing  years  of  the  nineties  were  remark- 
able for  the  rapid  progress  of  consolidation  of  industrial 
corporations,  and  it  was  only  natural  that  after  the  su- 
preme court  had  fastened  upon  the  railroads  the  burden 
of  the  Sherman  anti-trust  act,  those  whose  training  had 
fitted  them  for  the  unloading  of  securities  upon  the  public 
should  turn  their  attention  to  railroad  consolidation. 
Thus  the  Moore  brothers,  with  their  associates  in  the  pro- 
motion of  the  American  Tin  Plate  company  and  other 
great  industrial  combinations,  obtained  control  of  the  Chi- 
cago, Rock  Island,  and  Pacific  in  1901,  and  built  up  the 
great  Rock  Island  system  in  accordance  with  a  plan 
whereby  the  public  furnished  the  money  while  they  en- 
trenched themselves  in  a  position  where  their  control  is 
practically  secure  from  attack.  Obviously,  this  was  a  case 
where  the  motive  was  largely  speculative.^® 

Forms  of  Consolidation. — The  earliest  consolidations 
took  the  form  of  direct  union  or  fusion  of  the  share  capi- 
tal, properties,  and  franchises  of  two  or  more  railroads  in 
a  single  corporation.  This  plan  was  followed  at  the  or- 
ganization of  the  New  York  Central,  when  each  of  the 
constituent  companies  gave  up  corporate  identity,  and  their 
shareholders  exchanged  their  certificates  for  shares  in  the 
consolidated  company.  Other  instances  which  may  be 
cited  are:  the  union  of  the  Boston  and  Worcester  and 
the  Western  to  form  the  Boston  and  Albany,  and  of  the 
New  York  Central  with  the  Hudson  River  to  form  the 
New  York  Central  and  Hudson  River  railroad.  A  modi- 
is  See  Keya,  "The  Newest  Railroad  Power,"  World's  Work,  X,  6302- 
IS. 

290 


CONSOLIDATION 

fication  of  this  method  is  the  merger,  or  the  absorption  of 
one  or  more  corporations  by  another  which  retains  its 
corporate  existence  unaltered  save  through  modifications 
ordered  in  the  enabling  act.  Thus  the  Galena  and  Chi- 
cago Union  took  over  the  Mississippi  and  Rock  River 
Junction  railroad  in  1885,  and  the  shares  of  the  two  cor- 
porations were  ''blended  into  one  capital  stock"  in  the 
name  of  the  Galena  and  Chicago  Union.  Similarly,  the 
New  York  Central  absorbed  the  Buffalo  and  Niagara  Falls, 
the  Niagara  Falls  and  Lewiston,  and  the  Rochester  and 
Lake  Ontario  in  1855  by  the  conversion  of  the  shares  of 
these  companies  into  shares  of  the  New  York  Central. 
The  Kansas  Pacific  and  the  Denver  Pacific  were  merged 
in  the  Union  Pacific  in  1880.  Of  these  two  methods,  the 
direct  union  may  be  said  to  have  almost  gone  out  of  use, 
but  the  merger  is  still  employed,  usually  in  eases  where 
absolute  ownership  of  a  subsidiary  line  has  been  obtained 
through  the  gradual  acquisition  of  its  entire  share  cap- 
ital. 

Conveyance. — Sales  of  property  by  one  railroad  to  an- 
other seldom  takes  place.  In  1902,  however,  the  Illinois 
Central  purchased  the  Cecilia  branch  in  Kentucky  from 
the  Louisville  and  Nashville.  On  the  other  hand,  sales  of 
railroad  property  under  foreclosure  have  been  only  too 
common.  A  large  part  of  the  mileage  of  some  systems, 
notably  the  Southern,  was  acquired  through  this  means. 
The  Pennsylvania  in  1867  thus  acquired  title  to  the  Pitts- 
burgh and  Steubenville.  In  1879  the  Chicago  and  Alton 
purchased  the  property  of  the  Chicago  and  Illinois  River, 
and  in  1898  the  Illinois  Central  succeeded  to  the  owner- 
ship of  the  bankrupt  Chesapeake  and  Ohio  Southwest- 
ern. 

Share  Ownership. — A  railroad  may  hold  shares  either 
for  purposes  of  investment  or  to  secure  control  of  sub- 
sidiary  properties.     In  the   former   case   there  is  always 

291 


RAILROAD  FINANCE 

opportunity  for  speculation  on  the  part  of  directors,  and 
the  possibility  that  shares  purchased  "for  income"  may 
so  far  decline  as  to  represent  a  loss  to  the  company.  The 
losses  in  values  sustained  by  the  Union  Pacific  during  1907 
upon  its  large  holdings  of  shares  represented  over  twenty 
per  cent,  upon  their  cost.  In  1899,  according  to  the  an- 
nual report  of  the  interstate  commerce  commission  on 
the  statistics  of  railways,  the  railroads  of  the  United 
States  held  $1,207,498,299  out  of  the  total  of  $5,515,011,726 
of  railroad  share  capital  outstanding.  By  1909,  accord- 
ing to  the  same  authority,  their  holdings  had  increased 
to  $3,573,566,572,  while  the  total  share  capital  outstand- 
ing had  risen  to  $7,686,278,545.  Until  1906  the  railroad 
bonds  held  by  railroad  companies,  as  shown  by  these  re- 
ports, had  never  reached  ten  per  cent,  of  the  total.  In 
that  year  the  amount  was  $641,305,030.  This  is  evidence 
that  whatever  the  practice  of  particular  companies,  most 
railroads  hold  securities  not  for  income  but  for  control. 
Additional  light  was  thrown  upon  this  point  by  the  special 
report  of  the  interstate  commerce  commission  on  inter- 
corporate relationships  of  railways  in  the  United  States  as 
of  June  30,  1906,  published  in  1908.  This  report  was  pre- 
pared from  data  which  it  was  impossible  to  obtain  before 
the  enactment  of  the  Hepburn  law.  It  showed  that  out  of 
a  total  of  $8,884,234,925  of  railroad  share  capital  outstand- 
ing, the  railroad  companies  themselves  owned  $4,114,851,- 
990,  or  forty-six  per  cent.  Of  the  funded  debt,  they  held 
but  $1,440,360,507  out  of  $9,342,961,476,  or  fifteen  per  cent. 
Of  these  amounts  only  $440,519,546  of  share  capital  and 
$38,990,634  of  funded  debt  represented  securities  of  rail- 
roads outside  the  system  of  which  the  owner  corporation 
was  a  part,  and  the  statistician  of  the  commission  observed 
that  "The  striking  preponderance  of  stock  holdings,  which 
amount  to  92  per  cent,  of  the  total  holdings,  would  lead  to 
the  conclusion  that  pure  investment  is  not  the  purpose  pri- 

292 


CONSOLIDATION 

marily  held  in  mind  by  railway  corporations  in  purchas- 
ing securities  outside  their  own  systems.  "^^ 

Control  by  share  ownership  is  the  method  most  com- 
monly employed  to  hold  together  the  different  parts  of  a 
system.  The  end  may  be  obtained  through  individual  or 
family  ownership  of  a  dominating  interest  in  the  several 
corporations,  as  in  tlie  case  of  the  New  York  Central,  the 
Lake  Shore  and  Michigan  Southern,  and  the  Michigan 
Central  by  the  Vanderbilts,  prior  to  1898;  and  the  Mis- 
souri Pacific  and  the  International  and  Great  Northern, 
to-day,  by  the  Goulds.  Or  it  may  be  brought  about  through 
joint  ownership,  as  in  the  case  of  the  Colorado  Midland 
by  the  Denver  and  Rio  Grande  and  the  Colorado  and 
Southern.     But  these  are  among  the  exceptional  cases. 

Acquisition  of  Shares. — Shares  for  control  may  be  ob- 
tained in  various  ways.  They  may  be  purchased  upon  the 
market  or  directly  from  individual  shareholders,  or  they 
may  be  taken  over  in  accordance  with  a  formal  agreement 
providing  for  the  exchange  of  securities.  Where  only  a 
small  amount  is  outstanding,  they  may  be  purchased  for 
cash  without  inconvenience,  but  it  is  only  in  exceptional 
cases  that  a  railroad  has  a  surplus  sufficient  to  allow  much 
discretion  in  the  matter  of  payment.  Even  the  Union  Pa- 
cific with  its  enormous  surplus,  after  having  made  large 
purchases  of  shares  in  1906,  was  compelled  to  seek  addi- 
tional funds  through  an  issue  of  bonds  in  1908.  The  Chi- 
cago and  Alton  acquired  full  control  of  the  Alton  and  St. 
Louis  in  1867  in  accordance  with  a  plan  adopted  several 
years  before  by  which  a  cash  fund  was  set  aside  each  year 
to  provide  for  the  purchase  of  shares  as  opportunity 
offered.  Whenever  there  is  occasion  for  haste  or  stealth  in 
obtaining  control,  the  use  of  cash  is  imperative.  The  di- 
rectors of  the  Chicago  and  North  Western,  upon  plea  of 
necessity,  purchased  control  of  the  Chicago  and  Milwau- 

17  "Intercorporate  Relationships  of  Railways,"  36-7,  46. 

293 


RAILROAD  FINANCE 

kee  in  1865  without  delaying  to  seek  authority  from  the 
shareholders.  The  Baltimore  and  Ohio,  and  the  Pennsyl- 
vania in  1881,  engaged  in  a  contest  for  the  control  of  the 
Philadelphia,  Wilmington,  and  Baltimore,  which  was  won 
by  the  Pennsylvania,  but  at  a  cost  of  about  $18,000,000  in 
cash.  Part  of  this  sum  was  subsequently  made  up  by 
means  of  a  bond  issue,  and  part  through  the  sale  of  new 
shares.  "When  control  is  acquired  by  means  of  an  ex- 
change of  shares,  an  increase  of  capitalization  is  necessaiy. 
In  1899  the  share  capital  of  the  Union  Pacific  was  in- 
creased $27,000,000  to  provide  for  an  exchange  with  the 
shareholders  of  the  Oregon  Short  Line;  and  the  Missouri, 
Kansas,  and  Texas  issued  $2,500,000  of  new  shares,  the 
same  year,  to  exchange  for  shares  of  the  Kansas  City  and 
Pacific.  The  Denver  and  Rio  Grande,  after  having  re- 
served large  amounts  of  its  own  share  capital  to  exchange 
for  control  of  the  Rio  Grande  Western,  effected  its  pur- 
pose in  1901,  but  in  addition  to  the  shares,  it  turned  over 
part  payment  in  cash  and  part  in  consolidated  bonds. 

Collateral  Trust  Notes  as  Aids  to  Consolidation. — Shares 
purchased  for  control  must  be  retained,  but  they  maj^  be 
hypothecated  or  pledged  as  collateral  for  loans,  or  they 
may  be  placed  in  trust  as  collateral  security  for  an  issue 
of  bonds.  By  this  means  control  is  cheapened,  for  the 
greater  part  of  the  original  outlay  is  restored  to  the  work- 
ing capital  of  the  company.  The  collateral  trust  bond  is 
based  upon  the  same  principle  as  the  ordinary  secured 
note.  Its  use  is  not  new  in  railroad  finance,  but  in  the 
period  of  consolidation  which  began  about  1898  and  ended 
in  1907  it  was  employed  to  such  an  extent  that  it  came 
to  be  regarded  almost  as  one  of  the  indispensable  instru- 
ments of  railroad  consolidation.^* 

It  is  the  usual  practice  to  issue  these  bonds  directly  in 

18  See  Mitchell,  "The  Collateral  Trust  Mortgage  in  Railway  Fi- 
nance," Quar.  Jour,  of  Econ.,  XX,  443-54. 

294 


CONSOLIDATION 

exchange  for  the  shares  upon  which  they  are  secured. 
This  was  done  in  the  case  of  the  purchase  of  the  Lake 
Shore  and  Michigan  Southern  and  the  Michigan  Central 
by  the  New  York  Central  in  1898;  of  the  Chicago,  Bur- 
lington, and  Quincy  by  the  Great  Northern  and  the 
Northern  Pacific,  and  the  Central  of  New  Jersey  b}"  the 
Reading  in  1901;  and  also  of  the  Chicago,  Indianapolis, 
and  Louisville  by  the  Louisville  and  Nashville  and  the 
Southern  in  1902.  The  Southern,  however,  issued  guar- 
anteed shares  in  1901  in  exchange  for  shares  of  the  Mobile 
and  Ohio,  which  were  deposited  as  collateral  for  bonds 
which  were  exchanged  for  bonds  of  the  Mobile  and  Ohio. 
And  the  Union  Pacific,  preparatory  to  taking  over  work- 
ing control  of  the  Southern  Pacific  the  same  year,  sold  to 
its  shareholders  ten-year  first  mortgage  and  collateral  trust 
convertible  bonds,  and  with  the  funds  thus  obtained  pur- 
chased the  shares,  partly  upon  the  market,  but  mostly 
from  Kuhn,  Loeb,  and  company,  who  had  acquired  the 
shares  formerly  held  by  the  Huntington,  Stanford, 
Crocker,  and  Searles  families.  The  Atlantic  Coast  Line 
in  1902  took  over  the  control  of  the  Louisville  and  Nash- 
ville from  J.  P.  Morgan  and  company,  who  had  purchased 
the  shares  which  had  been  acquired  by  John  W.  Gates  and 
associates  upon  the  open  market.  In  return  it  gave 
seventy  per  cent,  of  the  purchase  price  in  collateral  trust 
bonds  secured  by  Louisville  and  Nashville  shares,  five  per 
cent,  in  shares,  and  the  balance  in  cash,  to  obtain  which 
new  shares  were  issued.  The  Rock  Island  system  has  been 
built  up  mainly  through  the  use  of  the  collateral  trust 
bond.  In  1901,  soon  after  coming  into  control  of  the 
Chicago,  Rock  Island,  and  Pacific  railway  company,  the 
]\Ioore  brothers  acquired  the  Choctaw,  Oklahoma,  and  Gulf 
by  exchanging  collateral  trust  bonds  for  its  shares.  In 
1902  they  organized  the  Chicago,  Rock  Island,  and  Pacific 
railroad  company  to  take  over  the  control  of  the  Chicago, 

295 


RAILROAD  FINANCE 

Rock  Island,  and  Pacific  railway  company,  and  to  acquire 
the  shares  which  were  still  in  the  hands  of  the  public. 
Their  purpose  was  accomplished  by  means  of  a  compli- 
cated plan  whereby  each  shareholder  of  the  old  company 
was  offered  in  exchange  for  his  shares,  their  par  in  col- 
lateral trust  bonds  with  a  bonus  to  the  same  amount  in 
shares.  These  shares  did  not  represent  ownership  in  the 
new  railroad  company,  but  in  the  Rock  Island  companj', 
which  had  been  organized  for  the  express  purpose  of  hold- 
ing all  of  its  shares.  In  1905  the  St.  Louis  and  San 
Francisco  acquired  a  majority  interest  in  the  Chicago  and 
Eastern  Illinois,  giving  in  exchange  for  the  shares,  interest- 
bearing  stock  trust  certificates,  which  are  similar  in  char- 
acter to  collateral  trust  bonds. 

Acquisition  of  control  is  simplified  in  cases  where  a 
large  block  of  shares  may  be  purchased  from  a  single 
holder.  The  Richmond  and  Danville  obtained  control  of 
the  Northeastern  of  Georgia  in  1881  through  a  purchase  of 
the  majority  interest  held  by  the  city  of  Athens;  and  the 
Gould  entrance  into  Baltimore  in  1902  was  effected  when 
the  control  of  the  Western  Maryland  was  purchased  from 
that  city.  In  1883  the  Chicago,  Burlington,  and  Quincy 
obtained  from  Jay  Gould  a  controlling  interest  in  the 
Hannibal  and  St.  Joseph;  and  in  1889  a  syndicate  repre- 
senting the  Cleveland,  Cincinnati,  Chicago,  and  St.  Louis 
purchased  control  of  the  Chesapeake  and  Ohio  from  Collis 
P.  Huntington. 

Minority  or  *' Working"  Control. — It  is  not  necessary  to 
own  a  majority  of  the  share  capital  of  a  companj'^  to  con- 
trol its  management.  A  concentrated  minority  interest 
may  exercise  practical  control  by  virtue  of  proxies  ob- 
tained from  shareholders  in  sympathy  with  its  policies,  or 
it  may  succeed  in  exerting  a  dominant  influence  because 
some  of  the  shareholders  neglect  both  to  vote  and  to  give 
proxies.     It  is  only  in  rare  instances  that  the  shares  repre- 

296 


CONSOLIDATION 

sented  at  a  shareholders'  meeting  amount  to  more  than 
three-fourths  of  the  total  outstanding.  Many  of  the 
proxies  voted  at  these  meetings  represent  shareholders 
who  have  signed  without  investigation  the  form  sent  them 
by  those  in  charge  of  the  management  of  the  company. 
The  Pennsylvania  is  able  to  control  the  Norfolk  and 
Western  by  virtue  of  ownership  of  less  than  forty  per  cent, 
of  the  share  capital  of  that  company.  The  combined  hold- 
ings of  the  Lake  Shore  and  ]\Iichigan  Southern  and  the 
Baltimore  and  Ohio  in  the  Reading  amounts  to  somewhat 
over  forty  per  cent.,  but  it  is  sufficient  to  insure  control. 
The  Chicago  and  North  Western  owns  $14,700,000  of  the 
share  capital  of  the  Chicago,  Minneapolis,  St.  Paul,  and 
Omaha,  with  a  capital  of  $29,818,865  outstanding,  but  with 
the  holdings  of  a  single  director,  F.  W.  Vanderbilt,  who 
owns  $1,500,000,  its  control  is  absolute.  Up  to  1907  the 
Lake  Shore  and  J\Iichigan  Southern  controlled  the  Cleve- 
land, Cincinnati,  Chicago,  and  St.  Louis  in  a  similar  man- 
ner, but  it  now  holds  a  majority  of  the  share  capital  in  its 
corporate  capacity.  The  Goulds  have  control  over  the 
Missouri  Pacific  and  the  Denver  and  Rio  Grande,  but  only 
because  of  the  support  of  the  Rockefeller  holdings.  The 
Gould  interest  in  the  Missouri  Pacific  amounts  to  only 
$20,215,000  out  of  $77,407,860  outstanding.  In  1905  it 
was  brought  out  in  the  Gould-Ramsay  contest  for  the  con- 
trol of  the  Wabash  that  the  Goulds,  owning  only  about  a 
third  of  the  shares,  were  able  to  attract  proxies  sufficient 
to  retain  their  mastery  over  the  affairs  of  the  company. 
The  Union  Pacific  controls  the  Southern  Pacific  with  out- 
standing capital  of  $272,672,205  through  the  ownership  of 
$126,610,000,  or  less  than  half  its  share  capital.  In  the 
course  of  his  testimony  before  the  interstate  commerce 
commission  in  1907,  Edward  H.  Harriman  said  that  for 
all  practical  purposes  thirty  per  cent,  of  the  shares  of  a 
railroad  hold  as  a  unit  was  sufficient  to  insure  control. 

297 


RAILROAD  FINANCE 

Minority  Control  and  Stock  Market  ''Raids." — The  his- 
tory of  railroad  finance  is  replete  with  episodes  which 
show  that  while  a  minority  interest  is  ordinarily  suffi- 
cient to  give  working  control,  there  is  always  a  possibility 
that  a  rival  interest  may  be  built  up  to  contest  for  that 
control.  Cornelius  Vanderbilt  in  this  manner  bought  his 
way  into  the  New  York  Central  in  1867,  and  his  son,  W.  H. 
Vanderbilt,  in  1879  acquired  the  Michigan  Central  through 
purchases  in  the  open  market.  John  W.  Gates  in  1902 
obtained  a  majority  interest  in  the  Louisville  and  Nash- 
ville by  one  of  the  most  notable  coups  ever  carried  out  on 
the  stock  exchange.  In  the  same  manner  the  Moores  cap- 
tured the  Chicago,  Rock  Island,  and  Pacific  in  1901,  and 
nearly  succeeded  in  their  attempt  to  acquire  the  Chicago 
and  North  Western  the  following  year.  With  the  aid  of 
Edwin  Hawley,  they  were  able  in  1904  to  wrest  from 
Harriman  the  control  of  the  Chicago  and  Alton  by  build- 
ing up  a  rival  minority  interest  which  was  eventually  in- 
creased to  a  majority.  This  road  had  already  been  the 
subject  of  a  similar  contest  in  1899,  when  a  syndicate  com- 
posed of  E.  H.  Harriman,  George  J.  Gould,  James  Still- 
man,  of  the  National  City  bank,  and  Mortimer  L.  Schiff, 
of  Kuhn,  Loeb,  and  company,  obtained  enough  shares  to 
enable  them  to  oust  the  Blackstone  management.  The 
Kansas  City  Southern,  for  several  years  a  Harriman  prop- 
erty, was  taken  over  in  1905  by  Herman  Sielcken,  who  had 
acquired  in  this  country  and  in  Holland  sufficient  certifi- 
cates to  accomplish  his  purpose  at  the  expiration  of  the 
voting  trust. 

Tendency  Toward  Absolute  Ownership. — There  is  a 
growing  tendency  in  the  direction  of  acquiring  absolute 
ownership  of  subsidiary  companies.  When  all  the  shares 
of  such  a  company  are  acquired  they  may  be  cancelled,  or  if 
it  is  desired  to  maintain  its  corporate  organization  they 
may  be  kept  in  the  treasury  or  deposited  in  trust.     The 

298 


CONSOLIDATION 

New  York  Central  policy  differs  from  that  of  the  Penn- 
sylvania in  this  respect.  It  has  held  all  of  the  share  capi- 
tal of  the  West  Shore  since  the  organization  of  that  com- 
pany in  1885,  but  it  has  operated  it  as  a  separate  property. 
The  Pennsylvania  having  obtained  absolute  control  of  the 
Philadelphia  and  Erie,  terminated  the  existence  of  that  cor- 
poration in  1907  and  took  title  to  its  property.  Such  a 
change  is  generally  thought  to  be  in  the  interest  of  econ- 
omy of  operation.  The  Chicago,  Milwaukee,  and  St.  Paul 
has  always  pupsued  this  policy.  Thus  in  1893  it  obtained 
a  deed  to  the  property  of  the  Milwaukee  and  Northern, 
absolute  ownership  of  which  it  had  acquired  in  1891. 
The  Delaware  and  Hudson  in  1908  purchased  the  last  out- 
standing share  of  the  New  York  and  Canada,  in  order  that 
it  might  do  away  with  the  expense  of  maintaining  the  or- 
ganization of  that  company.  In  the  same  way  the 
Southern  Pacific,  the  Chicago,  Burlington,  and  Quincy,  the 
Chicago  and  North  Western,  the  Atchison,  the  Denver  and 
Rio  Grande,  the  Missouri  Pacific,  and  the  Erie  have  taken 
steps  to  simplify  the  relationship  of  the  properties  under 
their  control.  It  is  the  practice  of  the  New  York,  New 
Haven,  and  Hartford  in  thus  merging  subsidiary  lines  to 
issue  bonds  for  betterments  in  the  name  of  the  old  com- 
pany prior  to  ending  its  corporate  identity.  In  this  way 
the  bonds  are  given  the  stability  and  the  security  attach- 
ing to  a  divisional  lien.  The  growth  of  the  New  Haven  as 
a  compact  system  has  been  encouraged  by  the  Connecticut 
statute  which  authorizes  the  condemnation  by  a  railroad 
company  of  the  outstanding  shares  of  a  corporation  in 
which  it  has  a  three-fourths  interest.^^  This  law  was  sus- 
tained in  1907  by  the  United  States  supreme  court.^" 

The  Lease  as  a  Means  of  Consolidation. — The  purpose  of 
actual  consolidation  may  be  effected  by  means  of  a  lease, 

i»L.  1895,  c.  232;  Gen.  stat.,  1902,  §3964. 
20  Offield  V.  N.  Y.,  N.  H.,  and  H.,  203  U.  S.,  372. 

299 


RAILROAD  FINANCE 

or  the  transfer  for  stated  payments  of  the  property  and 
franchises  of  one  corporation  to  another  for  a  term  of  years 
or  in  perpetuity^  This  method  has  been  adopted  for  a 
variety  of  reasons.  One  of  these  is  the  difficulty  of  re- 
ducing to  a  common  basis  the  securities  of  the  different 
corporations.  Another  and  more  potent  reason  is  popu- 
lar opposition  to  actual  consolidation,  which  has  been  active 
in  such  states  as  Texas  and  Minnesota.  But  while  inde- 
pendent lines  have  been  taken  over  in  numerous  instances 
under  this  form  of  agreement,  the  lease  is  most  often  em- 
ployed as  an  administrative  device  to  promote  the  har- 
monious operation  of  the  different  parts  of  a  system  con- 
trolled by  virtue  of  share  ownership.  Thus  the  New 
York  Central,  with  absolute  ownership  of  the  West  Shore, 
operates  that  property  under  a  lease  for  a  term  of  475 
years.  Such  an  arrangement  amounts  to  practical  con- 
solidation. 

Terms. — The  period  for  which  a  lease  may  run  varies. 
The  term  may  be  for  only  a  few  years;  it  may  extend  to 
the  end  of  the  corporate  existence  of  the  lessee;  or  it  may 
be  specifically  without  limit  as  to  time.  Leases  are  fre- 
quently executed  for  ninety-nine  years,  a  practice  which 
according  to  competent  authority,  is  due  to  force  of  tra- 
dition reaching  back  to  Roman  law,  which  assumed  one 
hundred  years  to  be  the  longest  term  of  human  life.^^  The 
lease  of  a  subsidiary  corporation  is  usually  for  a  longer 
term  than  is  possible  to  obtain  when  the  lessee  is  compara- 
tively or  wholly  independent.  But  the  Pennsylvania, 
which  leased  for  999  years  the  Philadelphia  and  Erie,  the 
Harrisburg  and  Lancaster,  the  Pittsburgh,  Fort  Wayne, 
and  Chicago,  and  other  controlled  lines,  also  took  over  the 
independent  United  Railroads  of  New  Jersey  for  the  same 
period. 

21  Baldwin,   "American  Railroad  Law,"  457. 

300 


CONSOLIDATION 

Long  Term  Leases  as  Preliminary _  to  Mergers. — Long 
term  leases  are  frequently  succeeded  by  mergers,  the 
lessee  thereby  surrendering  corporate  identity  and  ter- 
minating the  lease,  as  in  the  case  of  the  merger  of  the 
Philadelphia  and  Erie  in  the  Pennsylvania  in  1907.  The 
Beloit  and  Madison,  which  had  been  held  under  perpetual 
lease  by  the  Chicago  and  North  Western,  was  absorbed  in 
1871.  The  Chicago  and  Alton  operates  several  of  its  sub- 
sidiary lines  under  leases  in  perpetuity.  In  1879  the 
Chicago,  IMilwaukee,  and  St.  Paul  came  into  possession  of 
the  entire  share  capital  of  the  "Western  Union  railroad,  in 
which  it  had  owned  a  majority  interest  for  ten  years. 
Unable  under  the  laws  of  Illinois  to  take  over  the  property 
by  direct  conveyance,  it  executed  a  lease  for  a  nominal 
consideration  for  a  term  of  999  years.^^ 

Rentals. — Lease  rentals  may  be  contingent  upon  earnings, 
or  they  may  take  the  form  of  guaranteed  payments  of  in- 
terest and  dividends  upon  the  outstanding  securities  of  the 
lessee.  The  Chicago,  Rock  Island,  and  Pacific  leased  the 
Keokuk  and  Des  Moines  in  1878  for  thirty-five  per  cent, 
of  gross  earnings,  and  the  Des  Moines  and  Port  Dodge  in 
1888  for  a  rental  of  thirty  per  cent.  The  rental  which 
the  Pennsylvania  pays  under  its  lease  of  the  United  Rail- 
roads of  New  Jersey  is  the  interest  upon  the  bonds  and  a 
ten  per  cent,  dividend  upon  the  share  capital.  The  New 
York  Central  guarantees  a  dividend  of  eight  per  cent,  upon 
the  shares  of  the  Boston  and  Albany  and  interest  upon 
its  bonds.  The  Baltimore  and  Ohio  agreed  to  pay  the 
Central  Ohio  a  rental  of  thirty-five  per  cent,  of  gross  earn- 
ings for  five  years  after  1866,  and  thereafter  at  the  rate 
of  forty  per  cent.  A  similar  arrangement  is  in  effect  be- 
tween the  Cincinnati,  New  Orleans,  and  Texas  Pacific  and 

22  Carv,  "Organ,  and  Hist,  of  the  Chicago,  Milwaukee,  and  St. 
Paul,"  137. 

301 


RAILROAD  FINANCE 

the  Cincinnati  Southern.  But  when  in  1878  the  Atchison 
leased  the  Denver  and  Rio  Grande,  the  agreement  provided 
for  a  rental  beginning  at  forty-three  per  cent,  of  gross 
earnings,  but  to  be  gradually  reduced  to  a  minimum  of 
thirty-six  per  cent. 


CHAPTER  XVI 

CONSOLIDATION    (continued) 

Railroad  Trust  Proposed. — Charles  Fisk  Beach,  Jr., 
well  known  as  the  author  of  a  number  of  standard  legal 
treatises,  proposed  in  1889  the  formation  of  a  railroad  trust 
for  the  operation  of  all  the  railroads  in  a  given  territory 
"by  means  of  an  association  between  the  share  owners  of 
connecting,  parallel  or  competing  lines — associations  be- 
tween the  railways  themselves,  or  their  officials,  having 
proved  ineffectual."  This  suggestion  he  accompanied 
with  detailed  instructions.  "The  association  contem- 
plated must  be  entirely  between  the  individual  stock- 
holders or  stock  and  bond  holders,"  said  he,  "and  not  at 
all  between  the  railway  corporations  themselves.  The 
corporation  must  be  absolutely  independent  of  the  trust, 
and  wholly  separate  and  apart  from  it."  This  plan  con- 
templated the  division  of  the  country  into  sections,  and 
the  creation  in  each  section  of  a  separate  trust. 

These  several  trusts  could  all  be  iuter-associated  and  work 
together  to  a  common  end.  In  each  case  there  might  be  created 
a  trust  board  .  .  .  which  should  act  as  a  committee  of  the 
whole  in  determining  the  policy  of  the  trust,  but  to  be  subdivided 
into  as  many  sub-committees  ...  as  there  are  roads  to  be 
operated.  ...  A  majority  at  least  of  the  stock  of  each  of  the 
roads  should  then  be  conveyed  absolutely  to  the  trust,  and  the  title 
taken  in  the  names  of  these  sub-committees,  the  stock  of  each  road 
to  be  in  the  name  of  a  different  committee,  to  be  registered  on 
the  books  of  the  corporation  in  their  individual  names,  and  to 
be  held  by  them  for  the  purposes  declared  in  the  deed  of  trust. 
For  this  stock  so  conveyed  to  the  trust  there  shall  be  issued,  as 
usual,  trust  certiflcates.  .  .  .  This  majority  shall  elect  a 
board  of  directors  and  operate  the  property.    .    .    .    Each  road 

303 


RAILROAD  FINANCE 

will  thus  maintain  its  corporate  organization  and  carry  on  it8 
business  independently  ...  as  though  there  were  no  trust. 
Dividends  should,  in  every  instance,  be  declared  directly  on  the 
stock  of  each  road  as  earned,  and  paid  over,  as  usual,  directly 
to  each  stocliholder  as  the  stock  books  declare.  Thus  the  out- 
standing stock  will  receive  its  dividend  directly,  and  the  divi- 
dends on  the  stock  included  in  the  trust  will  be  paid  into  the 
trust  and  be  re-distributed  on  the  certificates. 

In  this  manner  there  was  to  be  created  "a  voluntary  un- 
incorporated association  between  the  owners  of  a  majority 
of  the  stock  of  the  allied  lines,"  and  the  inducements  to 
such  an  organization  were  declared  to  be:  "economy  in  the 
operation  of  the  associated  lines;  the  suppression  of  the 
competition  of  reckless  and  insolvent  rivals,  including  the 
prevention  of  rate  wars  and  rate  cutting;  the  prevention 
of  over-building,  involving  wholesome  restraint  upon  specu- 
lative construction;  .  .  .  the  protection  of  each  road 
from  the  encroachments  of  its  rival;  the  protection  of  all 
the  lines  in  the  construction  of  necessary  branches  and 
feeders,  and  the  protection  of  the  public  in  the  construction 
of  new  lines;  the  maintenance  of  steady  rates,  leaving  the 
railways  to  compete  in'  facilities  only  and  not  in  rates ; 
.  .  .  the  protection  of  the  weaker  lines,  and  an  arrest 
of  the  tendency  toward  their  absorption  by  the  stronger 
systems,  and  finally  a  stay  in  the  progress  now  certainly 
making  toward  governmental  interference  and  opera- 
tion. "^ 

But  while  this  plan  was  based  upon  a  recognition  of  the 
economic  truth  that  the  business  of  a  railroad  transporta- 
tion is  essentially  monopolistic,  it  was  foredoomed  to 
failure,  not  only  because  of  the  unreasoning  fear  of  the 
public  of  anything  in  the  guise  of  a  trust,  but  also  because 
the  people  and  the  courts  have  persisted  in  regarding  un- 
restrained competition  as  the  sole  remedy  for  all  traffic 

^Railway  and  Corp.  Law  Jour.,  VI,  61-3. 

304 


CONSOLIDATION 

evils.  And,  as  President  Hadley  has  observed  in  this 
connection,  the  year  1889  was  "a  bad  year  for  trusts."* 
The  tendency  of  judicial  decisions  since  about  that  time 
has  been  decidedly  averse  to  any  arrangement  constitut- 
ing a  partnership  of  corporations,  upon  the  ground  that  it 
is  inconsistent  with  the  scope  and  purpose  of  a  corpora- 
tion; that  it  interferes  with  the  management  of  a  corpo- 
ration by  its  own  officers;  that  it  impairs  the  authority  of 
shareholders ;  and  that  it  is  contrary  to  public  policy  as  in- 
volving the  delegation  of  corporate  powers  and  the  practi- 
cal consolidation  of  corporations  in  defiance  of  statutory 
authority.^ 

Holding  Companies. — A  most  effective  agency  for 
bringing  about  practical  consolidation  has  been  found  in 
the  holding  company — a  corporation  which  holds  and  deals 
in  the  securities  of  other  corporations.  Such  a  company 
may  be  a  finance  company  merely,  or  it  may  operate  the 
properties  which  it  controls.  A  railroad  company,  more- 
over, by  virtue  of  extensive  ownership  of  securities,  may 
become  a  holding  company  in  everything  but  the  name. 
The  oldest  holding  company  is  also  an  operating  company. 
This  is  the  Pennsylvania  company  charted  in  1870,*  to  take 
over  the  lines  of  the  Pennsylvania  system  west  of  Pitts- 
burgh. From  the  first  it  has  operated  the  Pittsburgh, 
Fort  Wayne,  and  Chicago,  but  the  other  great  subsidiary 
lines,  the  Vandalia,  and  the  Pittsburg,  Cincinnati,  Chicago, 
and  St.  Louis  are  operated  by  their  own  organizations. 
The  entire  share  capital  of  the  Pennsylvania  company  is 
held  by  the  Pennsylvania  railroad. 

The  Southern  Pacific  company,  holding  fee  title  to  nine 
miles  of  railroad,  controls  through  share  ownership  a  sys- 
tem of  as  many  thousand  miles.     It  is  a  Kentucky  eorpo- 

2  Hadley,  "Prohibition  of  Railroad  Pools,"  Quar.  Jour,  of  Econ., 
IV,  168-9. 

3  Noyes,  "Intercorporate  Relations,"  §§  314-5. 
*L.  Pa.  1870,  no.  949. 

31  305 


RAILROAD  FINANCE 

ration,  chartered  in  1884^  to  concentrate  the  ownership 
of  the  railroads  between  San  Francisco  and  New  Orleans, 
and  to  operate  these  lines  controlled  by  Collis  P.  Hunting- 
ton, Leland  Stanford,  and  Charles  Crocker.  These  three, 
with  Mark  Hopkins  and  E.  B.  Crocker,  had  been  associated 
in  the  construction  and  management  of  this  great  system. 
E.  B.  Crocker  was  the  first  to  die,  and  his  interest  was 
bought  by  the  survivors.  In  1874  these  men,  conscious  of 
approaching  age  and  desirous  of  husbanding  their  ener- 
gies, sold  an  interest  to  David  D.  Colton,  who  was  active 
in  the  management  until  his  death  in  1878.  Meanwhile, 
Hopkins  also  had  died  in  1878,  and  upon  the  remarriage 
of  his  widow,  the  control  of  his  interest  passed  into  the 
hands  of  Edward  F.  Searles,  who  having  no  taste  for  rail- 
roading executed  his  proxies  in  favor  of  Huntington. 
Colton 's  interest  was  purchased  from  his  widow  by  the  sur- 
vivors.^ The  question  again  presented  itself,  therefore, 
as  to  a  method  by  which  these  men  could  relieve  themselves 
of  their  responsibilities  and  at  the  same  time  retain  their 
control.  To  Huntington  came  the  idea  of  a  holding  com- 
pany to  take  over  their  shares  in  the  various  properties 
and  issue  against  them  certificates  of  its  own.  In  order  to 
remove  themselves  as  far  as  possible  from  the  jurisdiction 
of  courts  and  legislatures  whose  attitude  was  often  hos- 
tile, it  was  decided  to  seek  a  charter  in  some  state  entirely 
outside  the  section  in  which  their  property  was  located. 
His  connection  with  the  Chesapeake  and  Ohio  had  enabled 
Huntington  to  acquire  influence  in  legislative  circles  in 
Kentucky,  and  for  that  reason  the  charter  was  taken  out 
in  that  state.'''  The  new  company  took  over  the  manage- 
ment of  the  Southern  Pacific  system  proper  through  what 
was  known  as  the  "Omnibus"  lease  in  1885,  and  also 
leased  the  Central  Pacific  the  same  year,  and  the  Oregon 

5L.  1883-4,  c.  403.  e  Colton  v.  Stanford,  82  Cal.,  351. 

7  Doyle,    "Central    Pacific    Railroad    Debt,"    55    Cong.    1    sess.,   S. 
rep.  V.  1,  no.  20,  pp.  303-4. 

306 


CONSOLIDATION 

and  California  in  1887.  The  "Omnibus"  lease  was  abro- 
gated in  1901,  though  before  that  time  most  of  the  lines  in 
Texas  had  been  separately  operated  in  conformity  with  the 
law  of  that  state.  The  Southern  Pacific  railroad  company 
was  organized  in  1902  to  take  over  the  shares  of  the 
Southern  Pacific  railroad  companies  of  California,  Arizona, 
and  New  Mexico.  It  is  purely  a  holding  company,  and 
the  properties  under  its  control  are  operated  under  lease 
by  the  Southern  Pacific  company,  which  holds  a  large  ma- 
jority of  its  share  capital. 

A  third  holding  company,  which  was  also  an  operating 
company,  was  the  Wisconsin  Central  company.  This  was 
incorporated  under  the  laws  of  Wisconsin  in  1887  for  the 
purpose  of  acquiring  control  of  the  Wisconsin  Central  rail- 
road and  seven  connecting  roads,  comprising  the  "Wis- 
consin Central  Associated  Lines."  It  obtained  a  ma- 
jority interest  in  each  of  these  companies,  and  began 
operations  in  1888,  though  the  separate  operation  of  the 
Wisconsin  Central  railroad  and  its  leased  line,  the  Min- 
nesota and  Lake  Winnebago,  was  continued.  A  receiver 
was  appointed  for  the  Wisconsin  Central  railroad  in  1893, 
and  in  the  reorganization  of  that  property  in  1899,  the 
Wisconsin    Central    company   disappeared. 

The  Great  Northern  railway  company  was  an  operating 
holding  company  until  1907.  Its  forerunner  was  the 
Minneapolis  and  St.  Cloud,  chartered  by  the  territorial 
legislature  of  Minnesota  in  1856,  and  in  1869  authorized  to 
change  its  corporate  name  at  the  discretion  of  the  direc- 
tors. In  1890  the  company  under  its  new  name  leased 
for  999  years  the  St.  Paul,  Minneapolis,  and  Manitoba,  and 
acquired  in  exchange  for  its  own  shares  the  shares  held  by 
that  company,  representing  absolute  control  of  the  Montana 
Central,  the  Wilmar  and  Sioux  Falls,  the  Duluth,  Water- 
town,  and  Pacific,  and  the  Eastern  of  Minnesota.  These 
lines  it  also  leased.     Since  1898  practically  the  entire  share 

307 


RAILROAD  FINANCE 

capital  of  the  "Manitoba"  company  has  been  acquired  by 
the  Great  Northern  by  exchange  of  shares.  Late  in  1907 
the  Great  Northern  acquired  the  title  to  the  property  of 
all  these  companies. 

In  1873  the  Southern  Railway  Security  company  was 
organized  under  the  charter  of  the  Overland  Contract 
company,  granted  by  the  state  of  Pennsylvania  in  1871, 
and  conferring  all  the  powers  enjoyed  by  the  Pennsylva- 
nia company.^  To  this  company  the  Pennsylvania  rail- 
road turned  over  the  controlling  interest  in  the  East  Ten- 
nessee, Virginia,  and  Georgia,  the  Memphis  and  Charles- 
ton, and  several  minor  lines  between  Richmond  and 
Charleston,  together  with  the  three-fifths  interest  in  the 
Richmond  and  Danville  which  it  had  bought  from  the 
state  of  Virginia  in  1871.  The  new  company  was  not  a 
success,  and  in  1876  it  disposed  of  practically  all  its  hold- 
ings except  the  Richmond  and  Danville  shares,  which  it 
finally  sold  when  in  1881  the  Scott  policy  of  extension 
southwards  was  abandoned.  This  was  a  finance  company, 
with  no  concern  in  matters  of  operation. 

Upon  regaining  independence  the  Richmond  and  Dan- 
ville adopted  a  policy  of  expansion,  but  as  it  was  limited 
by  its  charter  to  ownership  of  shares  in  connecting  lines, 
an  auxiliary  organization  was  necessary  for  its  purpose. 
This  was  found  in  the  Richmond  and  West  Point  Ter- 
minal Railway  and  Warehouse  company,  chartered  in  1880, 
and  endowed  with  ample  powers.^  By  means  of  shares 
purchased  in  the  name  of  this  company,  the  Richmond  and 
Danville  acquired  control  of  a  network  of  railroads  in  Vir- 
ginia, Tennessee,  North  Carolina,  and  Georgia.  In  1884 
it  obtained  an  amendment  to  its  charter  which  made  an 
intermediate  company  no  longer  necessary.  In  1886, 
therefore,  it  purchased  from  the  "Terminal  company"  the 

8L.  Pa.,  1871,  no.  395;  1874,  appx.  1873,  no.  318. 
»L.  Va.,  1880,  c.  238. 

308 


CONSOLIDATION 

securities  of  the  subsidiary  lines,  and  sold  its  controlling 
interest  in  that  company.  The  lines  acquired  in  this  man- 
ner were  then  leased. 

The  "Terminal"  company  thus  set  adrift,  turned  about 
and  bought  control  of  the  Richmond  and  Danville.  By 
1889  it  had  acquired  substantially  all  the  shares  of  this 
company,  and  in  1892  when  it  was  taken  over  by  a  re- 
ceiver it  controlled  besides  the  Richmond  and  Danville, 
the  East  Tennessee,  Virginia,  and  Georgia,  and  the  Cen- 
tral Railroad  and  Banking  company  of  Georgia — a  sys- 
tem of  over  9000  miles,  which  was  operated  not  by  the 
"Terminal"  company,  but  by  the  subsidiary  companies 
under  their  own  organizations. 

Because  the  constitution  of  Georgia  prohibited  railroad 
companies  from  acquiring  shares  of  competing  lines,  the 
"Terminal"  company  in  1888  took  over  the  Central  of 
Georgia  through  the  Georgia  company,  an  intermediate 
holding  company,  organized  under  the  general  laws  of 
North  Carolina  in  1887.  The  shares  of  the  Central  of 
Georgia  were  placed  in  trust  by  the  Georgia  company  with 
the  voting  power  in  the  name  of  the  "Terminal"  company, 
and  the  various  companies  were  also  connected  through 
the  medium  of  leases,  but  the  arrangement  was  in  1892 
condemned  by  the  courts.^" 

Henry  Villard  in  1881  incorporated  the  Oregon  and 
Transcontinental  company  under  the  laws  of  Oregon. 
This  was  a  finance  company,  organized  to  hold  the  shares 
of  the  Oregon  Railway  and  Navigation  company,  of  which 
Villard  was  president,  and  also  the  controlling  interest  in 
the  Northern  Pacific,  which  had  been  acquired  by  means 
of  the  celebrated  "blind  pool"  of  that  year.  It  was 
through  this  company  that  the  funds  were  raised  to  com- 
plete the  Northern  Pacific,  and  also  to  build  branch  lines 

10  Clarke  v.  C.  R.  R.  and  B.  Co.,  50  Fed.  Rep.,  338;  Clarke  v.  R. 
and  W.  P.  T.  R.  and  W.  Co.,  62  Fed.  Rep.,  328. 

309 


RAILROAD  FINANCE 

which  the  Northern  Pacific  under  its  charter  had  no  au- 
thority to  construct.  An  attempt  was  also  made  to  con- 
struct the  Oregon  and  California,  and  in  1883  the  un- 
finished line  was  leased  in  perpetuity,  but  the  arrange- 
ment was  broken  off  within  a  year.  The  Oregon  and 
Transcontinental  company,  according  to  Villard  himself, 
was  a  "grievous  disappointment."  In  the  financial  diffi- 
culties in  which  the  system  almost  immediately  became  in- 
volved, the  control  of  the  Oregon  Railway  and  Navigation 
company  was  lost.  In  1890  the  Oregon  and  Transconti- 
nental company  became  the  North  American  company  of 
New  Jersey.^^ 

The  foregoing,  with  one  exception,  constituted  the  im- 
portant experiments  with  the  holding  company  prior  to 
1900.  The  exception  is  the  Reading  company,  which  grew 
out  of  the  reorganization  of  the  Philadelphia  and  Read- 
ing railroad  in  1896.  Under  the  charter  of  1833  the  rail- 
road company  had  enjoyed  the  right  to  own  shares  of  in- 
dustrial corporations,  but  this  privilege,  under  the  con- 
stitution of  1873,  could  not  be  conferred  upon  the  Phila- 
delphia and  Reading  railway  company,  which  pur- 
chased the  property  of  the  old  company  at  foreclosure 
sale.  The  reorganizers  therefore  purchased  control  of  the 
National  company,  which  had  been  chartered  in  1871  as 
the  Excelsior  Enterprise  company,  and  endowed  with  all 
the  powers  conferred  upon  the  Pennsylvania  company.^ ^ 
To  this  company  they  conveyed  the  entire  share  capital  of 
the  new  railway  company,  and  of  the  Philadelphia  and 
Reading  Coal  and  Iron  company.  In  1901  the  Reading 
company  acquired  a  controlling  interest  in  the  Central  of 
New  Jersey. 

Railroad  Securities  Company. — The  non-operating  hold- 
ing company  was  admirably  adapted  to  the  purposes  of  the 

"Villard,  "Memoirs,"  II,  295-300,  341-4;  Smallev,  "Hist,  of  the 
Northern  Pacific,"  265-8.  12  L.  Pa.,  1871,  no.  983. 

310 


CONSOLIDATION 

financial  interests  which  became  active  in  promoting  railroad 
consolidation  about  the  end  of  the  last  century.  When 
in  1900  the  Atlantic  Coast  Line  railroad  was  organized 
through  the  consolidation  of  the  Atlantic  Coast  Line  rail- 
roads of  Virginia  and  South  Carolina,  the  Norfolk  and 
Carolina,  and  the  Wilmington  and  Weldon,  the  majority 
of  the  shares  was  taken  by  the  Atlantic  Coast  Line  com- 
pany, incorporated  in  Connecticut  in  1889.  In  1900,  also, 
the  American  Securities  Investment  company  of  New  Jer- 
sey, which  had  been  dormant  since  its  incorporation  in 
1896,  began  active  operations  as  the  Railroad  Securities 
company.  While  empowered  to  purchase  the  securities  of 
any  railroad,  it  has  confined  its  attention  to  Illinois  Cen- 
tral, of  which  it  has  held  95,000  shares  for  several  years. 
Its  share  capital  amounts  to  $8,000,000,  of  which  the 
Union  Pacific  holds  a  large  majority.  By  virtue  of  these 
shares,  together  with  the  Illinois  Central  shares  owned  di- 
rectly by  the  Union  Pacific  and  the  proxies  of  friendly  in- 
terests, the  Harriman  control  of  the  Illinois  Central  was 
established  in  1908. 

Northern  Securities  Company. — As  early  as  1896  an 
attempt  was  made  to  unite  the  controlling  interests  in  the 
Great  Northern  and  the  Northern  Pacific  by  means  of  an 
arrangement  whereby  the  Great  Northern  was  to  take  one- 
half  of  the  Northern  Pacific  shares  and  to  guarantee  the 
bonds  of  that  company.  This  plan  was  declared  in  con- 
flict with  the  Minnesota  law  forbidding  the  consolidation 
of  parallel  and  competing  lines.^^  In  1901  these  com- 
panies attempted  to  buy  joint  control  of  the  Chicago, 
Milwaukee,  and  St.  Paul,  and  thus  effect  an  entrance  into 
Chicago.  This  resulted  in  failure,  but  a  controlling  in- 
terest in  the  Chicago,  Burlington,  and  Quincy  was  ob- 
tained. The  Union  Pacific,  which  already  held  over 
$8,000,000  of  the  share  capital  in  this  company,  sought  an 

isPearsall  v.  Great  Northern,  161  U.  S.,  G46. 

311 


RAILROAD  FINANCE 

allotment  of  additional  shares,  and  the  refusal  of  this  ap- 
plication led  Harriman  to  attempt  to  buy  control  of  the 
Northern  Pacific.  After  a  memorable  contest,  which 
culminated  in  the  crisis  of  ]\Iay  9,  1901,  when  Northern 
Pacific  common  shares  were  quoted  on  the  stock  exchange 
at  $1000,  a  majority  interest  was  acquired,  made  up  of 
$37,000,000  common,  and  $41,000,000  preferred  shares. 
The  Hill-Morgan  interests,  however,  held  a  clear  majority 
of  the  common  shares,  and  by  virtue  of  this  fact  could  re- 
tire the  preferred  shares  on  any  first  of  January  prior  to 
1917,  thus  eliminating  over  half  of  Harriman 's  shares, 
and  effectually  barring  him  from  control.  But  Harriman, 
by  virtue  of  his  majority  interest,  could  control  the  elec- 
tion of  directors  at  the  forthcoming  meeting  in  October, 
and  thus  prevent  the  retirement  of  his  preferred  shares. 
While  this  might  have  been  made  impossible  by  means  of 
a  postponement  of  the  annual  meeting  until  after  the  close 
of  the  year,  the  conflicting  parties  soon  came  together  in 
an  agreement  by  which  J.  P.  Morgan  was  chosen  to  select 
a  board  of  directors  for  the  Northern  Pacific  which  should 
be  representative  of  all  parties  in  interest. 

It  was  then  that  the  idea  of  a  holding  company  was 
proposed.  As  in  the  case  of  the  Southern  Pacific,  the 
men  who  had  built  up  the  Great  Northern  felt  themselves 
growing  too  old  for  active  participation  in  the  management 
of  the  company,  and  various  plans  had  been  considered 
by  which  they  could  withdraw  without  allowing  hostile  in- 
terests to  come  into  control.  But  the  motives  for  the  for- 
mation of  a  holding  company  were  not  altogether  personal. 

Says  Doctor  B.  H.  Meyer: 

They  were  personal,  in  so  far  as  the  Securities  Company  was  the 
outgrowth  of  a  desire  on  the  part  of  certain  men  to  perpetuate  a 
certain  policy.  They  were  economic  in  that  the  execution  of  cer- 
tain large,  almost  empire  building  plans  could  be  promoted  in  the 
estimation  of  its  founders  by  the  Company.    The  founders  of  the 

312 


CONSOLIDATION 

Company,  through  years  of  effort,  had  become  accustomed  to  asso- 
ciate their  railway  properties  with  a  certain  economic  policy.  And 
thus  the  personal  and  economic  causes  of  the  organization  of  the 
Company  practically  became  merged  into  one,  namely,  the  desire  to 
insure  uninterrupted  progress  in  the  building  of  a  great  system  of 
transportation.14 

With  the  cooperation  of  the  Union  Pacific  interest,  the 
Northern  Securities  company  was  therefore  incorporated 
in  New  Jersey  in  1901  to  take  over  the  shares  of  the  Great 
Northern  and  the  Northern  Pacific.  This  was  accom- 
plished, and  the  shareholders  of  the  two  companies  dis- 
appeared as  such,  but  reappeared  as  shareholders  of  the 
holding  company. 

The  new  organization  was  at  once  attacked  by  the  state 
authorities  of  jMinnesota,  and  soon  afterwards  by  the 
federal  government.  On  March  14,  1904,  the  United 
States  supreme  court  declared  the  Northern  Securities 
company  a  combination  in  restraint  of  trade  within  the 
meaning  of  the  Sherman  anti-trust  act.^^  The  decision  in 
this  case  was  based  upon  the  fact  that  this  company  pos- 
sessed the  power  to  suppress  competition  between  paral- 
lel lines.  It  had  no  reference  to  the  validity  of  the  hold- 
ing company  as  an  instrument  of  corporation  finance. 
Says  Doctor  Meyer:  "From  the  point  of  view  of  railway 
organization,  the  case  presents  little  of  consequence,  ex- 
cept that  railway  corporate  organization,  in  the  process 
of  metamorphosis  or  evolution,  must  avoid  the  technicality 
of  the  particular  type  of  holding  company  which  the 
Northern  Securities  Company  represented.  From  the  point 
of  view  of  railway  regulation  and  the  relations  between 
the  general  public  interests  and  private  railway  manage^ 
ment,  the  case  has  no  significance  whatsoever."^" 

Eock   Island. — A   holding  company   modeled   after  the 

14  Meyer,  "Hist,  of  the  Northern  Securities  Case,"  226. 
16  U.  S.  V.  Northern  Securities,  193  U.  S.,  197. 
i«  Meyer,  305. 

313 


RAILROAD  FINANCE 

Northern  Securities  company  incorporated  under  the  laws 
of  New  Jersey  is  the  Rock  Island  company,  organized  in 
1902  by  the  Moore  brothers  and  their  associates  to  insure 
centralized  control  over  the  operation  of  the  Chicago, 
Rock  Island,  and  Pacific  railway  and  other  lines.  This 
was  accomplished  through  an  intermediate  holding  com- 
pany, the  Chicago,  Rock  Island,  and  Pacific  railroad  com- 
pany, incorporated  the  same  year  under  the  laws  of  Iowa, 
the  entire  share  capital  of  which  is  held  by  the  Rock 
Island  company.  The  Rock  Island  company  has  outstand- 
ing about  $49,000,000  of  preferred  shares,  and  $89,000,000 
of  common  shares,  and  holders  of  the  preferred  shares  are 
entitled  to  elect  a  majority  of  the  directors — a  privilege 
which  may  be  surrendered  only  with  the  consent  of  two- 
thirds  of  those  shares.  Moreover,  the  amount  of  preferred 
shares  may  be  increased  only  upon  consent  of  two-thirds 
of  the  shares  of  each  issue.  Thus  the  holders  of  $25,- 
000,000  of  the  preferred  shares  are  able  to  dominate  the 
situation;  but  as  the  common  shares  represent  only  a 
nominal  outlay  the  fact  is  without  particular  significance. 
''Queen  and  Crescent"  Group. — An  illustration  of  the 
complicated  relationships  which  it  is  possible  to  establish 
between  railroad  companies  by  means  of  the  holding  com- 
pany is  offered  by  the  lines  constituting  the  ''Queen  and 
Crescent"  route.  The  Alabama  and  Great  Southern  rail- 
road was  organized  in  1877  as  successor  to  the  bankrupt 
Alabama  and  Chattanooga,  running  from  Meridian  to 
Chattanooga.  Substantially  the  entire  share  capital  of  the 
new  company  was  immediately  taken  over  by  the  Alabama 
Great  Southern  railway  company,  an  English  corporation, 
registered  in  1877.  Upon  the  organization  of  the  Cincin- 
nati, New  Orleans,  and  Texas  Pacific  in  1881,  a  majority 
of  its  share  capital  was  taken  by  the  Alabama  Great 
Southern  railway  company.  A  second  English  corpora- 
tion, the  Alabama,  New  Orleans,  Texas  and  Pacific  Junc- 

314 


CONSOLIDATION 

tion  Railways  company  was  registered  in  1881  to  provide 
the  capital  required  to  purchase  control  of  railroads  which 
could  be  advantageously  associated  with  the  Alabama 
Great  Southern.  It  at  once  acquired  control  of  the  Ala- 
bama Great  Southern  itself,  and  the  Vicksburg  and  Meridian 
(now  Alabama  and  Vicksburg),  and  also  two  unfurnished 
lines,  the  New  Orleans  and  Northeastern,  opened  in  1883, 
and  the  Vicksburg,  Shreveport,  and  Pacific,  opened  in  1884. 
In  1890  the  East  Tennessee,  Virginia,  and  Georgia  with 
the  cooperation  of  the  Richmond  and  Danville,  acquired 
a  majority  of  the  share  capital  of  the  Alabama  Great 
Southern  in  the  interest  of  the  Richmond  and  West  Point 
Terminal  Railway  and  Warehouse  company.  The 
Southern,  as  successor  to  the  "Terminal"  company,  by 
purchase  under  foreclosure  sale  of  collateral  pledged  by 
the  East  Tennessee,  Virginia,  and  Georgia,  and  otherwise, 
acquired  a  clear  majority  of  the  Alabama  Great  Southern 
share  capital  in  1895.  This  carried  with  it  control  of  the 
Cincinnati,  New  Orleans,  and  Texas  Pacific,  and  arrange- 
ments were  at  once  made  whereby  the  majority  interest  in 
that  company  should  be  held  jointly  by  the  Southern  and 
the  Cincinnati,  Hamilton,  and  Dayton.  To  this  end  the 
controlling  shares  were  given  over  to  the  Southwestern 
Construction  company,  in  which  the  Southern  through  the 
Alabama  Great  Southern  and  the  Cincinnati,  Hamilton, 
and  Dayton  through  the  Michigan  Securities  company  held 
a  majority  interest.  With  the  addition  of  the  large 
minority  interest  held  by  the  Alabama,  New  Orleans, 
Texas  and  Pacific  Junction  Railways  company,  control  of 
this  company  is  practically  absolute. 

Richmond-Washington  Company. — Another  noteworthy 
example  of  the  use  to  which  the  holding  company 
may  be  put  is  the  Richmond- Washington  company,  incorpo- 
rated in  New  Jersey  in  1901.  This  company  owns  all  of 
the  share  capital  of  the  Washington  Southern,  and  a  ma- 

315 


RAILROAD  FINANCE 

jority  of  the  share  capital  of  the  Richmond,  Fredericks- 
burg, and  Potomac,  which  are  operated  as  a  "union"  line 
in  the  interest  of  the  Pennsylvania,  the  Baltimore  and 
Ohio,  the  Atlantic  Coast  Line,  the  Southern,  the  Seaboard 
Air  Line,  and  the  Chesapeake  and  Ohio,  each  of  which 
holds  one-sixth  of  the  share  capital  of  the  Richmond- 
Washington  company. 

Railroads  as  Holding  Companies. — Since  the  adminis- 
trative reorganization  of  the  Vanderbilt  system  in  1898,  the 
New  York  Central  has  taken  advantage  of  the  remarkable 
earning  power  of  the  Lake  Shore  and  Michigan  Southern 
to  concentrate  in  the  name  of  that  company  the  control 
of  its  Western  lines,  thus  transforming  it  into  a  virtual 
intermediate  holding  company.  In  1899  this  company's 
holdings  of  railroad  shares  amounted  to  $21,008,750,  most 
of  which  represented  control  of  the  New  York,  Chicago, 
and  St.  Louis,  and  the  Pittsburgh  and  Lake  Erie.  In  ten 
years  this  was  increased  to  $133,081,800,  and  majority  in- 
terests acquired  in  the  Cleveland,  Cincinnati,  Chicago,  and 
St.  Louis,  the  Lake  Erie  and  Western,  and  the  Chicago, 
Indiana,  and  Southern,  besides  important  minority  in- 
terests in  the  Reading.  In  a  similar  manner,  the  Union 
Pacific  holds  in  the  name  of  the  Oregon  Short  Line  the 
controlling  shares  of  the  Oregon  Railroad  and  Naviga- 
tion company,  the  Southern  Pacific,  and  the  San  Pedro, 
Los  Angeles,  and  Salt  Lake,  with  large  blocks  of  shares  in 
the  Atchison,  the  Baltimore  and  Ohio,  the  Chicago,  Mil- 
waukee, and  St.  Paul,  the  Chicago  and  North  Western,  and 
the  New  York  Central. 

The  Missouri  Pacific  is  the  holding  company  for  the 
Gould  system.  It  owns  the  entire  share  capital  of  the 
St.  Louis,  Iron  Mountain,  and  Southern,  and  large  inter- 
ests in  the  Denver  and  Rio  Grande,  the  Texas  and  Pacific, 
and  the  Wabash.  Since  1907,  when  the  Consolidated  rail- 
way company  was  merged  in  the  New  York,  New  Haven 

316 


CONSOLIDATION 

and  Hartford,  the  New  Haven  has  been  a  great  holding 
company  with  chartered  powers  to  invest  in  or  to  operate 
almost  any  sort  of  business  in  which  it  may  find  a  profit. 
Besides  the  New  York,  Ontario,  and  Western,  it  controls 
through  share  ownership,  the  Central  New  England  rail- 
way. It  also  owns  all  the  shares  and  bonds  of  the  Bos- 
ton Railroad  Holding  companj^,  chartered  by  Ma.ssachu- 
setts,  in  1909  ^^  to  take  over  the  New  Haven  holdings  of 
Boston  and  Maine  shares.  Through  this  company  the  New 
Haven  now  holds  substantial  control  of  the  Boston  and 
Maine. 

Single  Railroad  Holding  Company  Proposed. — Mr.  "Wil- 
liam W.  Cook,  a  New  York  attorney  of  recognized  stand- 
ing, has  proposed  the  holding  company  as  a  means  through 
which  the  railroads  of  the  country  might  be  brought  to- 
gether to  the  mutual  benefit  of  themselves  and  of  the  pub- 
lic. He  would  have  this  company  chartered  by  congress 
to  acquire  gradually  the  shares  of  all  the  railroads  directly 
from  the  owners  and  also  in  the  open  market.  In  exchange 
for  these  shares  it  would  give  its  own  shares  at  a  valuation 
to  be  determined  by  the  interstate  commerce  commission, 
or  cash  obtained  from  the  sale  of  its  own  shares  in  the 
open  market.  This  corporation  would  have  a  board  of  di- 
rectors made  up  of  the  members  of  the  interstate  commerce 
commission  and  representatives  of  the  shareholders  suffi- 
cient to  constitute  a  majority.  To  the  interstate  commerce 
commission  also,  would  be  given  power  to  vote  the  railroad 
shares  to  be  held  by  the  holding  company.  Railroad  shares 
once  purchased  could  not  be  sold  or  encumbered,  so  there 
would  be  no  temptation  offered  to  financial  interests  to  seek 
control.  Finally,  to  make  the  shares  of  this  company  at- 
tractive, a  government  guarantee  of  dividends  at  a  low  rate, 
three  per  cent.,  is  suggested,  all  advances  on  this  account 

17  L.  1909,  c.  519;  also  Commercial  and  Financial  Chronicle, 
LXXXVIII,  1618. 

317 


RAILROAD  FINANCE 

to  be  made  good  to  the  government  ont  of  fntnre  surplus.*^ 
Effects  of  Consolidation. — Consolidation  has  indisputa- 
bly resulted  in  the  development  of  operative  economy  and 
efficiency,  and  consequently  in  greatly  improving  the  qual- 
ity of  service.  But  the  effect  upon  the  service  has  not  been 
uniformly  favorable.  At  the  very  beginning  of  the  period 
of  trunk  line  development,  Henry  V.  Poor  deplored  the 
progress  of  consolidation  in  the  belief  that:  "Just  in  pro- 
portion as  the  mileage  of  a  railroad  is  increased,  will  the 
sense  of  responsibility  be  weakened  on  the  part  of  those 
entrust(?d  with  its  management. ' '  ^^  This  of  course  cannot 
be  maintained  as  a  general  proposition,  but  it  is  only  neces- 
sary to  cite  the  instance  of  the  Boston  and  Albany  under 
its  lease  to  the  New  York  Central  to  show  that  consolida- 
tion may  result  in  the  introduction  of  bureaucratic  methods 
of  administration  with  the  inevitable  effect  upon  the  qual- 
ity of  service. 

The  effect  of  consolidation  upon  rates  has  been  to  pro- 
mote stability.  The  more  flagrant  varieties  of  rate-cutting 
have  been  done  away  with,  though  other  influences  have 
also  been  operative  to  produce  this  result.  Community  of 
interest  has  proved  a  disappointment  as  a  means  of  pro- 
moting the  stability  of  rates.  It  has  served,  however,  to 
promote  the  formation  of  territorial  groups,  and  the  con- 
centration of  railroad  control  in  the  hands  of  a  small  num- 
ber of  financial  interests.  But  competition,  as  President 
E.  P.  Ripley  of  the  Atchison  once  pointed  out,  is  not  neces- 
sarily restricted  by  consolidation.  According  to  his  state- 
ment, the  general  result  of  consolidation  upon  his  system 
has  been  to  relieve  competition  at  one  point  and  to  inten- 
sify it  at  another.'"    Upon  the  adjustment  of  rates  as  be- 

18  Cook,  "A  Governmental  Holding  Companj%"  North  Amer.  Rev.. 
CLXXXVII.  88G07  (in08);  see  also  Rankin,  "An  American  Trans- 
portation  Svstem,"   259-450.      (1909.) 

19  Poor's  Manual,   18G9-70:   xxxi. 

20  Chicago  conference  on  trusts,  553. 

318 


CONSOLIDATION 

tween  different  cities  and  different  sections  of  the  country, 
consolidation  has  had  an  undoubted  effect. 

Consolidation  has  affected  the  holder  of  railroad  securi- 
ties in  as  many  different  ways  as  there  are  varieties  of  se- 
curities and  methods  of  consolidation.  Bondholders  in 
small  companies  which  have  been  absorbed  have  generally 
profited;  for  when  they  have  retained  their  bonds  they 
have  often  received  a  guarantee  of  interest  payments,  and 
when  they  have  given  up  their  bonds  in  exchange  for  bonds 
of  the  consolidated  company  they  have  on  the  average  bet- 
tered their  security.  Shareholders  have  frequently  re- 
ceived guarantees  of  dividends,  or  they  have  exchanged 
their  shares  for  securities  in  the  consolidated  company 
upon  terms  which  usually  have  been  liberal.  When,  as  in 
the  case  of  the  Lake  Shore,  a  small  number  of  shareholders 
refuse  to  accept  the  terms  of  exchange,  they  may  ulti- 
mately sell  their  holdings  at  a  great  advance,  but  this  fact 
does  not  of  itself  afford  ground  for  the  charge  that  the 
terms  were  unreasonable.  A  higher  price  is  to  be  expected 
from  the  decreased  supply  of  outstanding  shares.  On  the 
other  hand,  security  holders  in  the  company  which  offers 
these  generous  terms  may  profit  from  the  increase  of  traffic 
resulting  from  the  merger.  But  as  such  transactions  are 
most  often  carried  out  in  prosperous  times,  there  is  danger 
that  optimism  may  lead  to  the  payment  of  excessive  prices 
for  securities,  or  the  giving  of  guarantees  which  may  add 
to  fixed  charges. 

In  general  the  securities  of  a  consolidated  company  are 
based  upon  a  greater  range  of  property,  and  their  owner- 
ship is  more  widely  distributed.  They  are  therefore  less 
liable  to  disturbances  resulting  from  local  causes  but  more 
subject  to  the  changes  of  the  stock  market.  The  investor 
in  the  shares  of  such  a  company  must  face  the  fact  that 
consolidation  usually  results  in  inflation.  As  a  result  of 
consolidation  many  standard  ■  investment  shares — Burling- 

319 


RAILROAD  FINANCE 

ton,  Rock  Island,  Lake  Shore,  Michigan  Central — have  dis- 
appeared from  the  investment  field,  and  there  is  difficulty 
in  determining  the  desirability  of  the  securities  issued  in 
their  stead. 

Public  Interest. — From  the  viewpoint  of  public  policy 
there  is  cause  for  concern  in  the  fact  that  in  consolidation 
involving  the  issue  of  additional  securities  it  is  almost  im- 
possible to  eliminate  the  speculative  evil.  More  than  one 
consolidation  has  been  carried  out  to  the  accompaniment  of 
ugly  rumors  which  none  have  attempted  to  deny.  Capital- 
ists with  daring  use  of  credit  have  captured  whole  systems 
through  aid  of  the  collateral  trust  bond,  and  established 
themselves  in  positions  of  stable  control  by  means  of  the 
holding  company,  the  fundamental  idea  of  which  is  to  en- 
able a  minority  to  rule.  Competent  financiers  maintain 
that  such  an  autocratic  device  must  unquestionably  result 
to  the  public  advantage.  Others  as  competent  affect  to  see 
in  it  the  promise  of  a  downfall  of  efficient  management  and 
bankruptcy  on  a  tremendous  scale.  However  that  may  be, 
minority  rule  in  railroad  finance  is  no  new  thing,  if  we 
are  to  consider  the  interests  of  all  the  parties  concerned. 
The  bondholders  have  long  furnished  the  bulk  of  the  capi- 
tal, but  the  management  has  usually  been  in  the  control  of 
those  whose  actual  contributions  have  been  comparatively 
small;  and  this  relationship  has  been  maintained  de- 
spite the  protests  of  injured  parties.  The  subject  of  con- 
solidation cannot  be  discussed  without  reference  to  the 
question  of  the  fidelity  of  directors  to  their  trust.  We  have 
made  great  advances  in  the  ethics  of  corporate  manage- 
ment '^  since  the  time  of  Alexander  Mitchell  and  Commo- 
dore Vanderbilt;  but  conceding  the  necessity  for  railroad 
consolidation,  we  may  well  maintain  a  watchful  care  to 
see  that  the  terms  by  which  it  is  effected  are  equitable  in 
themselves    and    fair    toward    the    public    interest.     Said 

81  See  Hadley,  "Standards  of  Public  Morality,"  79-96. 

320 


CONSOLIDATION 

Charles  Fisk  Beach,  Jr. :  ' '  Legitimate  railway  management 
imperatively  requires  that  the  manager  of  a  railway  keep 
out  of  Wall  Street,  at  least  so  far  as  the  securities  of  the 
road  he  manages  are  concerned.  It  is  his  function  to  op- 
erate his  road  and  to  discharge  the  trust  committed  to  him 
as  a  business  man,  and  not  as  a  bull  or  a  bear  on  the  Stock 
Exchange."--  This  statement,  written  twenty  years  ago, 
still  has  its  application. 

22  Railway  and  Corp.  Laio  Jour.,  VI,  62. 


L3 


CHAPTER  XVII 

OVERCAPITALIZATION 

Fundamental  Concepts  Relating  to  Capital. — As  has 
been  said  in  preceding  chapters,  indefinitenes,s  of  con- 
cept as  to  what  constitutes  capitalization — what  are  capi- 
tal assets  and  what  are  capital  liabilities — has  necessarily 
caused  confusion  of  ideas  and  lack  of  conclusiveness  in  dis- 
cussions of  overcapitalization.  Proceeding  from  well 
chosen  premises,  some  writers  have  convinced  themselves 
that  such  a  condition  as  overcapitalization  is  impossible. 
Others  have  admitted  the  possibility,  but  they  have  insisted 
that  the  condition  does  not  exist.  Still  others  see  in  what 
they  call  overcapitalization,  a  serious  menace  to  both  pub- 
lic and  private  welfare.  Accepting  the  definition  of  cor- 
porate capital  which  is  commonly  employed  in  considering 
the  financial  affairs  of  an  individual  or  of  a  partnership ; 
assuming  that  capital  assets  are  all  those  funds,  properties, 
and  equipment  required  for  continuous,  productive  use, 
and  that  capital  liabilities  are  those  obligations  incurred 
in  procuring  those  funds,  properties,  and  equipment,  a  cor- 
poration can  be  overcapitalized  only  when  it  has  more  re- 
sources than  it  can  economically  employ  in  carrying  on  the 
business  for  which  it  is  organized  and  maintained.  This 
would  be  equally  true  whether  considering  its  assets  or  its 
liabilities. 

The  relations  of  investors  to  the  corporation  and  their 
relations  to  each  other  are  expressed  in  the  contracts  of  the 
corporation.  When  the  entire  amount  of  capital  is  ob- 
tained from  shareholders,  overcapitalization  will  have  the 
effect  of  reducing  the  proportionate  returns  in  dividends 

322 


OVERCAPITALIZATION 

or  the  equitable  rights  in  the  distribution  of  the  surplus. 
When  there  are  several  classes  of  shareholders,  each  hold- 
ing different  rights,  overcapitalization  might  work  hard- 
ship on  common  shareholders  by  having  all  the  net  revenue 
and  surplus,  and  under  certain  contracts  of  preferment, 
all  the  capital  as  well,  absorbed  by  those  holding  preferen- 
tial rights.  For  the  same  reason,  when  liabilities  are  is- 
sued to  creditors  for  capital,  the  inability  to  use  advan- 
tageously all  the  funds,  properties,  and  equipment  might 
operate  to  defeat  the  interests  of  shareholders.  Considera- 
tion of  these  possibilities  serves  only  to  clear  the  way ;  since 
from  the  viewpoint  of  the  corporation  or  of  the  investor, 
American  railroads  have  been  overcapitalized  in  but  few  if 
any  instances.  The  common  experience  has  been  to  have 
inadequate  capital  for  conducting  and  developing  the  busi- 
ness of  transportation. 

The  subject  of  overcapitalization,  so  far  as  it  has  any 
present  interest,  relates  to  the  rights  of  the  public  in  the 
public  highway  for  the  capitalization,  operation,  and  main- 
tenance of  which  corporations  as  agencies  of  the  state  have 
been  chartered  and  capitalized.  The  public  interest  in  the 
corporation  may  be  stated  as  relating  to  control  over  the 
adequacy,  safety,  and  convenience  of  the  highway,  over 
rates  of  transportation  service,  and  over  the  administration 
of  laws  governing  the  conduct  of  business — the  legality 
and  morality  of  the  agents  of  the  corporation  in  their  deal- 
ings with  investors,  with  the  public,  with  each  other,  and 
with  the  corporation  itself.  The  limitations  of  public  reg- 
ulations of  the  affairs  of  the  corporation,  its  capitalization, 
and  its  management,  are  expressed  in  constitutional  and 
statutory  provisions  against  violation  of  contracts,  confis- 
cation, and  the  exercise  of  control  adverse  to  public  policy. 
In  legislation  and  judicial  rulings,  the  guiding  principle  is 
adequacy  of  return  on  capital  invested.  The  application 
of  this  principle  depends  upon  ascertaining  what  is  the 

323 


RAILROAD  FINANCE 

capital  of  the  corporation  to  which  a  rate  of  return,  judi- 
cially considered  as  adequate,  is  to  be  applied.  From  the 
viewpoint  of  the  public,  overcapitalization  as  the  term  is 
employed  by  those  who  are  concerned  with  public  regula- 
tion, is  the  amount  by  which  the  represented  shares  and 
capital  liabilities  of  a  corporation  exceed  the  value  of  its 
capital  assets. 

Determination  of  the  Amount  of  Capitalization. — As  has 
been  pointed  out  in  another  relation,  the  principal  barrier 
to  judicial  consideration  of  questions  of  capital  is  lack  of 
evidence.  The  most  readily  accessible  form  of  evidence 
consists  of  records  and  documents.  In  dealing  with  mat- 
ters of  capitalization,  this  form  of  evidence  is  almost  en- 
tirely lacking;  in  fact  in  many  instances  it  has  been  the 
purpose  of  corporation  managers  to  make  such  evidence 
unavailable.  Documents  representing  capital  contributions 
are  not  found  in  share  certificates  and  in  instruments  of 
liabilities  issued  for  capital.  The  best  evidence  of  capital 
acquired  is  in  the  checks  which  represent  transfers  of 
funds,  properties,  and  equipment  acquired  in  exchange  for 
securities  issued;  in  instruments  representing  expenditures 
of  funds  acquired;  and  in  the  accounts  of  the  corporation 
in  which  these  documentary  materials  are  assembled.  In 
this  respect  the  records  of  railroad  companies  are  sadly 
lacking;  the  instruments  representing  liabilities  are  not  to 
be  relied  upon;  the  instruments  of  transfer  are  purposely 
misleading;  the  instruments  of  expenditure  are  either  in- 
complete or  purposely  deceptive ;  the  accounts  carry  totals 
and  balances  which  are  of  practically  no  value  in  arriving 
at  judicial  conclusions.  Furthermore,  railroad  corpora- 
tions have  made  no  attempt  to  keep  a  true  capital  account. 
Unlike  the  English  law,  our  statutes  have  not  required 
railroad  corporations  even  to  account  for  capital  receipts 
and  expenditures,  to  say  nothing  of  depreciation,  waste, 
and  loss.     The  only  method  of  determining  present  capi- 

324 


OVERCAPITALIZATION 

talization  open  to  public  authority  is  appraisement;  and 
except  under  extraordinary  circumstances,  this  is  imprac- 
ticable for  a  court  to  employ. 

Standards  of  Appraisement. — Statements  and  estimates 
as  to  the  value  of  railroad  properties  have  been  based  upon 
several  different  standards  such  as:  original  cost  less  de- 
preciation; cost  of  reproduction;  realization  value;  and  the 
amount  of  outstanding  liabilities.  In  this  relation  it  ia 
submitted  that  to  be  useful,  judgment  as  to  value  must 
have  reference  to  the  purpose  of  the  estimate.  An  ap- 
praisement may  be  made  for  any  purpose,  either  public 
or  private,  which  relates  to  a  business  in  which  property 
is  used.  Appraisement  as  related  to  capitalization  and 
overcapitalization  is  a  matter  of  direct  public  concern. 
Conservation  of  the  public  interest  without  violation  of 
constitutional  and  statutory  guarantees  requires  evidence 
as  to  whether  any  particular  form  of  regulation,  desir- 
able in  itself,  will  prevent  the  corporation  from  operating 
so  as  to  make  an  adequate  return  upon  the  investment. 

Amount  of  Liabilities. — As  related  to  the  subject  under 
discussion,  the  primary  purpose  of  an  appraisement  is  to 
determine  what  is  the  amount  of  the  investment.  But  a 
court  of  inquiry,  interested  in  the  matter  of  public  regula- 
tion, should  not  be  concerned  as  to  the  amount  of  capital 
liabilities  which  are  shown  by  the  books  of  account  of  the 
corporation  except  to  the  extent  that  such  records  might 
furnish  collateral  evidence.  Shares  may  have  been  issued 
in  exchange  for  little  money,  or  as  a  direct  bonus  to  facili- 
tate the  sale  of  bonds.  Or  they  may  have  been  issued  in 
exchange  for  properties  which  were  taken  at  excessive 
prices.  Bonds  may  have  been  issued  at  a  discount;  a 
practice  the  result  of  which  would  be  to  increase  the  actual 
rate  above  the  contractual  rate  of  return.     A  valuation  of 

325 


RAILROAD  FINANCE 

assets  which  will  serve  the  purposes  of  a  court  or  commis- 
sion which  has  under  consideration  a  case  concerning  the 
fairness  of  railroad  rates  needs  no  other  basis  than  that 
which  is  or  should  be  employed  by  the  railroad  officials 
themselves  in  the  preparation  of  a  statement  of  financial 
condition.  Both  must  assume  that  certain  assets  are  for 
continuous,  productive  use,  and  that  certain  other  assets 
are  intended  for  immediate  realization  or  conversion  into 
cash.  Both  must  assume  a  different  basis  for  the  valuation 
of  each  class  of  assets,  and  consider  the  relation  of  esti- 
mated value  of  non-capital  assets  to  non-capital  liabilities 
in  order  to  ascertain  whether  the  capital  has  been  pre- 
served intact. 

Original  Cost,  Less  Depreciation. — A  popular  theory  is 
that  capitalization  should  be  limited  to  original  cost  less 
depreciation,  and  that  this  standard  would  establish  the 
investment  basis  for  judicial  consideration  of  the  adequacy 
of  charges  for  transportation  services.  Accepting  this 
standard,  the  only  function  of  an  appraisement  would  be  to 
test  the  adequacy  of  provisions  which  the  corporation  con- 
cerned has  made  for  depreciation.  But  no  railroad  has 
accounts  which  will  show  this  information.  The  book  cost 
rarely  if  ever  bears  any  definite  relation  to  the  amount 
which  has  been  expended  upon  the  property,  and  not  until 
the  interstate  commerce  commission  was  given  full  author- 
ity over  railroad  accounts  was  there  any  consistent  attempt 
to  keep  a  true  capital  account  and  to  provide  adequately 
for  the  factor  of  depreciation.  Consequently,  not  an  item 
in  the  balance  sheet  may  be  accepted  without  question  as 
indicative  of  the  investment  basis  for  valuation.  This 
being  the  case,  the  appraisement  would  have  to  begin  with 
an  inventory,  the  classification  of  which  would  have  little 
or  no  relation  to  the  accounts. 

Original  Cost  Impossible  of  Determination. — Many  rail- 
roads were  built  by  construction  companies,  which  received 

326 


OVERCAPITALIZATION 

compensation  far  in  excess  of  the  actual  outlay  of  capital. 
And,  as  has  been  shown,  it  has  been  the  custom  to  give 
shares  as  a  bonus  in  order  to  facilitate  the  sale  of  bonds  to 
finance  the  construction  of  lines  into  undeveloped  territory. 
In  the  case  of  far  too  many  railroads,  construction  has 
been  carried  out  by  an  incompetent  or  dishonest  manage- 
ment, whose  extravagances  or  peculations  have  added  to 
costs.  Labor  and  materials  have  often  been  obtainable  only 
at  high  prices,  and  much  capital  has  been  expended  upon 
experiments  with  facilities  which  have  become  obsolete  be- 
fore adequate  return  could  be  derived  from  their  use. 
Thus  iron  rails  costing  fifty  dollars  and  upwards  per  ton 
were  laid  upon  all  early  railroads,  only  to  be  displaced  by 
rails  of  steel  after  the  introduction  of  the  Bessemer 
process.  It  has  been  claimed  that  the  original  rails  upon 
the  Central  Pacific  cost  over  one  hundred  and  forty  dol- 
lars per  ton. 

While  there  may  have  been  sufficient  reasons  for  the 
capitalizing  of  such  expenditures  in  the  first  instance  with- 
out regard  to  their  propriety,  there  are  valid  objections 
to  allowing  the  balance-sheet  cost  thas  set  up  to  remain  as 
a  permanent  burden  upon  the  future.  Without  liberal 
deductions  from  sur])lus  to  eliminate  excessive  capitaliza- 
tion, as  is  tlie  practice  with  industrial  concerns,  railroad 
costs  as  shown  by  the  accounts  have  only  bookkeeping  sig- 
nificance. On  the  other  hand,  original  cost  may  be  too 
low  to  represent  the  amount  which  may  be  properly  cap- 
italized. Construction  may  conceivably  take  place  at  a 
period  when  labor  and  materials  are  at  an  abnormally  low 
level  of  prices,  and  it  is  only  fair  that  a  return  should  be 
allowed  for  managerial  efficiency  which  makes  this  possi- 
ble. Most  railroad  systems  contain  subsidiary  lines  which 
have  been  taken  over  at  exorbitant  prices,  yet  in  the  ma- 
jority of  such  cases  the  elimination  of  competition  or  the 
acquisition  of  a  position  of  strategic  advantage  has  fur- 

327 


RAILROAD  FINANCE 

nished  a  sufficient  reason  to  warrant  the  expenditure. 
Cost  of  Reproduction. — Cost  of  reproduction  as  a  basis 
of  valuation  has  been  accepted  with  some  modifications  by 
the  courts  in  cases  concerning  the  fairness  of  rates.  This 
involves  the  determination  of  the  cost  of  rebuilding  or  re- 
acquiring the  property  under  present  conditions,  fair  al- 
lowance being  made  for  depreciation  so  as  to  represent  the 
property  at  the  time  of  valuation.  In  employing  this 
method,  it  is  the  practice  to  leave  out  of  consideration  all 
property  which  is  not  concerned  with  transportation.  On 
the  other  hand,  some  have  thought  it  improper  to  appraise 
realty  as  well  as  structural  property  upon  the  basis  of 
cost  of  reproduction  upon  the  ground  that  real  estate 
differs  from  other  varieties  of  railroad  property  in  that 
it  is  not  subject  to  reproduction  "in  unlimited  quantities, 
and  of  uniform  cost.  "^  But  if  deduction  is  made  for  de- 
preciation of  structures,  so  also  may  allowance  be  made  for 
additions  to  represent  the  differential  advantage  accruing 
to  a  railroad  from  the  possession  of  rights  of  way  or  ter- 
minals of  strategic  value.  It  is  submitted  that  the  posses- 
sion of  the  terminal  properties  in  New  York  by  the  New 
York  Central  is  an  indication  of  foresight  and  capacity, 
while  the  neglect  of  the  Wisconsin  Central  to  obtain  inde- 
pendent entrance  into  St.  Paul,  Minneapolis,  Milwaukee, 
and  Chicago  indicates  the  absence  of  such  qualities.  It  is 
suggested  also  that  to  allow  a  return  that  is  proportionate 
to  efficiency  is  only  fair.  As  the  railroad  commission  of 
Wisconsin  has  said,  "The  owners  of  railroad  property  are 
entitled  to  any  increase  in  the  value  of  their  property  that 
may  accrue  from  the  progress  of  the  territory  in  which  it 
lies,  and  .  .  .  they  have  as  much  right  to  the  natural 
increment  in  the  physical  value  of  their  property  as  the 
owners  of  any  other  property. ' '  ^ 

1  Dr.  Henry  C.  Adams,  in  Report  of  the  industrial  commission,  IX, 
375. 

2  Buell  V.  Chicago,  Milwaukee,  and  St.  Paul,  February   16,   1007; 

328 


OVERCAPITALIZATION 

Official  Appraisals. — Official  appraisals  of  railroad  prop- 
ert}'  have  been  made  in  several  states.  The  railroad  com- 
mission of  Texas,  acting  under  authority  of  the  commission 
laws  of  1891  ^  and  1893/  determined  that  to  duplicate  the 
railroads  in  that  state  would  require  $16,500  per  mile.® 
In  this  estimate,  however,  no  deduction  was  made  for 
depreciation.  A  senate  committee  in  ]\Iinnesota  reported 
in  1907  that  $27,000  per  mile  would  represent  the  cost  of 
reproducing  the  railroad  property  in  that  state.  Both  of 
these  appraisals  were  undertaken  to  ascertain  a  fair  valua- 
tion upon  which  the  reasonableness  of  rates  might  be  de- 
termined. The  railroad  and  warehouse  commission  of 
]\Iinnesota  in  1908  made  a  thorough  investigation  of  the 
physical  value  of  railroad  property,  and  prepared  esti- 
mates according  to  two  plans  which  represented,  respec- 
tively, the  contentions  of  the  commission  and  of  the  rail- 
road companies  as  to  the  factors  to  be  included  in  the  ap- 
praisals. According  to  one  estimate,  the  value  of  the 
physical  property  of  the  nineteen  carrying  railroads  in  the 
state  on  June  30,  1907,  was  $45,799  per  mile  of  main  line 
roadway,  $43,358  per  mile  of  all  main  tracks,  and  $33,583 
per  mile  of  all  tracks.  According  to  the  other  estimate, 
the  corresponding  figures  were  $39,571,  $37,462,  and 
$29,016.*^  Michigan  in  1900  and  Wisconsin  in  1903  con- 
ducted investigations  to  determine  the  valuation  of  rail- 
road property  as  a  basis  for  taxation.  Upon  the  principle 
of  cost  of  reproduction,  ]\Iichigan  railroads  were  found  to  be 
worth  $21,500  per  mile,  or  without  allowing  for  deprecia- 
tion, $26,100.  In  Wisconsin,  $25,500  per  mile  was  the  val- 
uation set  upon  the  property,  and  it  was  estimated  that 
$30,900  per  mile  would  represent  the  cost  of  duplicating  it 

162.     See  also  Baker,  "Valuation  of  Terminal  Lands,"  Jour,  of  Ac- 
couniancy,  VIIT,  237-49. 

3L.  18!)1,  c.  51.  5  Annual  reports,   1894-6. 

4L.  18!).3,  c.  50.  6  Annual  report,   1908:    55,   76. 

329 


RAILROAD  FINANCE 

in  perfect  condition^  The  board  of  railroad  commission- 
ers of  South  Dakota  reported  that  the  value  of  the  railroad 
properties  in  that  state  on  June  30,  1909,  was  $23,183  per 
mile  of  main  line,  and  that  the  reproduction  value  was 
$26,925  per  mile  of  main  line.^ 

Distinction  Between  Valuations  for  Taxation,  Rate  Mak- 
ing, and  Capitalization. — The  results  obtained  in  these 
states  furnish  us  with  certain  rough  indexes  of  value,  but 
it  is  submitted  that  valuation  for  the  purpose  of  taxation 
should  not  be  the  same  as  valuation  for  determining  the 
reasonableness  of  rates,  and  that  neither  will  necessarily 
bear  any  definite  relation  to  valuation  for  the  purpose  of 
establishing  proper  relations  as  between  investors.  For 
taxation,  principles  of  equity  require  that  each  citizen  and 
enterprise  shall  contribute  according  to  ability.  Ability 
to  contribute  is  ability  to  obtain  revenue ;  and  valuation 
for  taxation  may  be  fairly  placed  on  an  income  basis.  For 
rate-making,  principles  of  equity  require  that  the  rate 
should  not  be  arbitrarily  reduced  by  governmental  author- 
ity below  a  point  at  which,  with  efficient  management,  a 
fair  rate  of  return  upon  the  investment  may  be  obtained. 
For  purposes  of  adjustment  of  relations  between  those  who 
hold  bonds  and  shares,  a  great  variety  of  conditions  may 
require  consideration,  but  with  them  neither  the  taxing 
body  nor  the  regulating  body  would  be  concerned. 

In  determining  a  basis  for  taxation  it  is  customary  and 
proper  to  assess  all  railroad  property  which  was  received 
in  the  form  of  donations,  whether  the  property  is  used  for 
transportation  purposes  or  not;  also  all  franchises,  and 
non-physical  rights  which  contribute  to  earning  power. 
But  an  appraisement  for  the  purpose  of  establishing  a  fair 

7  Ripley,  "Railroad  Valuation,"  Pol.  ,S'ct.  Quar.,  XXII,  577-610; 
"Railway  Valuation  in  Michigan  and  Wisconsin,"  Census  Bulletin, 
no.  21:    76-87. 

8  Board  of  Railroad  Commissioners  of  S.  D.,  Railroad  appraisal, 
tables  3  and  4. 

330 


OVERCAPITALIZATION 

basis  for  rate-making  might  properly  exclude  all  these 
items  except  donations ;  and  donations  could  not  be  in- 
cluded in  an  appraisement  for  determining  a  fair  rate  of 
return  on  investment.''  There  is  no  good  reason  why  the 
capitalization  of  good  will  should  not  be  allowed  for  pur- 
poses of  taxation,  but  this  would  be  of  questionable  pro- 
priety if  the  purpose  be  rate-making.  Favorable  connec- 
tions with  established  industries  and  with  other  railroads 
and  efficiency  of  management  tend  to  increase  earning 
power.  To  limit  capitalization  to  actual  investment  would 
cause  a  railroad  thus  situated  to  receive  a  high  rate  of 
return,  but  one  which  could  not  be  reduced  through  a  gov- 
ernmental reduction  of  rates  of  transportation  without 
jeopardizing  those  competing  railroads  which  are  less  fa- 
vorably situated.  For  purposes  of  taxation,  the  non- 
physical  value  of  Michigan  railroads,  as  determined  by 
Doctor  Henry  C.  Adams,  included  franchise  values,^"  and 
the  aggregate  was  only  about  twenty  per  cent,  of  the  cost 
of  reproduction  of  the  physical  properties  at  their  full 
value,  or  an  amount  substantially  the  same  as  that  which 
was  deducted  to  represent  depreciation.  This  result  was 
obtained  from  the  income  accounts  of  a  series  of  years  by 
capitalizing  at  seven  per  cent,  the  surplus  which  remained 
after  deductions  had  been  made  from  net  corporate  in- 

9  "We  do  not  believe  that  the  good  will  of  a  railway  company,  the 
supposed  franchise  value,  the  advantage  due  to  strategic  location,  or 
llie  efficiency  of  the  organization  of  tlie  company  as  affecting  the 
ability  to  facilitate  the  performance  of  its  duties  as  a  common  car- 
rier should  be  taken  into  consideration  for  the  purpose  of  arriving 
at  the  value  of  the  railway  company's  property.  .  .  .  The  rate 
charged  to  the  public  for  the  transportation  of  property  should  not 
be  based  upon  any  value  which  takes  into  consideration  any  sup- 
posed intangible  value  or  any  franchise  value,  nor  should  it  be  based 
upon  any  charge  for  the  edicioncy  of  the  organization  of  the  com- 
pany to  perform  its  duties  to  the  public." — Jbid.,  5. 

10  In  Massachusetts  the  practice  of  capitalizing  franchises  never 
has  been  tolerated,  and  except  to  the  extent  that  money  has  been 
actually  paid  for  a  franchise  it  has  been  forbidden  by  New  York  (L. 
1907,  c.  429,  §  55)  and  Maryland   (L.  1910,  c.  180,  §  27). 

331 


RAILROAD  FINANCE 

come  to  provide  for  taxes,  rentals,  maintenance,  and  bet- 
terments.^^ 

It  is  apparent  that  the  primary  purpose  of  valuation  for 
taxation  or  rate-making  would  not  be  secured  by  estimat- 
ing cost  of  replacement.  A  franchise  which  may  have 
cost  nothing  may  not  be  renewable  at  any  cost ;  a  franchise 
which  cost  millions  might  now  be  had  for  the  asking;  ter- 
minal lands  may  have  been  donated  which  would  now  cost 
millions  of  dollars,  or  they  may  be  obtainable  under  pres- 
ent conditions  at  less  than  their  actual  cost.  A  tunnel, 
constructed  according  to  the  methods  of  a  generation  ago, 
may  have  cost  more  than  would  be  required  now.  While 
these  estimates  might  serve  a  useful  purpose  in  determining 
the  amount  of  reserve  which  should  be  set  aside  for  in- 
surance, depreciation,  or  new  construction,  they  would  not 
be  of  material  assistance  in  the  determination  of  the 
amount  of  capital  funds  which  have  been  invested,  or  at 
what  amount  the  investment  stands  at  the  time  adequacy 
of  return  upon  investment  is  a  material  issue  in  cohsider- 
ing  the  limits  of  public  regulation. 

Realization  Value. — Again,  it  is  a  matter  of  no  concern 
for  either  taxation  or  rate-making  as  to  what  amount 
might  be  realized  on  roadbed,  structures,  and  equipment  if 
sold.  Any  appraisement  which  will  be  useful  for  these 
purposes  must  be  of  the  properties  as  a  going  concern. 
The  value  of  the  capital  assets  of  a  corporation  which  has 
obtained  them  and  intends  to  use  them  for  productive  re- 
turn has  no  relation  whatever  to  the  amount  which  those 
assets  would  bring  if  sold.  The  value  of  the  New  York 
Central  terminal  lands  in  New  York  cannot  be  found  by 
considering  those  properties  merely  as  real  estate.  A  more 
adequate    figure   would    be    obtained    by    considering    the 

11  Adams,  "Valuation  of  the  Non-physical  Element  in  Railways," 
Mich.  Pol.  Sci.  Assoc,  Publications,  IV,  293-6;  Census  Bulletin,  no. 
21*.   78  Bl;   Report  of  tlie  industrial  commission,  IX,  375-9. 

332 


OVERCAPITALIZATION 

amount  which  the  Pennsj^lvania  found  it  necessary  to  pay 
for  entrance  into  that  city. 

On  the  other  hand,  various  arguments  have  been  pre- 
sented by  special  pleaders  attempting  to  show  that  upon 
the  basis  of  commercial  valuation,  our  railroads  are  not 
overcapitalized.  These  may  be  dismissed  as  irrelevant. 
Nor  is  the  amount  paid  for  a  railroad  or  for  railroad  se- 
curities to  be  considered  without  qualification.  Assuming 
that  through  collusion,  speculative  plunging,  financing  for 
purposes  of  control,  or  from  any  other  motive,  an  unwar- 
ranted amount  had  been  paid  for  a  property,  this  is  no 
reason  why  the  public  should  be  estopped  from  receiving  the 
benefit  of  such  rates  as  would  be  equitable  and  just  if  the 
property  had  been  built  anew.  To  the  extent  that  bad 
judgment  has  been  used  in  purchasing,  or  that  shares  or 
bonds  have  been  distributed  with  regard  only  to  adjusting 
conflicting  investment  relations,  or  that  shares  have  been 
purchased  and  sold  in  the  market  without  regard  to  the 
condition  of  the  property,  or  purchased  and  sold  at  prices 
determined  by  present  earnings  which  are  unfair  to  the 
public,  these  circumstances  should  not  be  permitted  to 
operate  as  a  permanent  barrier  to  ultimate  adjustment  of 
rates  of  transportation.  ]\Iany  of  these  factors  have  not 
the  remotest  connection  with  the  questions  at  issue,  and  it 
is  unnecessary  to  consider  them  seriously  here.  With  all 
due  allowance  for  the  large  sums  which  have  been  ex- 
pended upon  betterments  and  additions  and  charged 
against  current  earnings,  thus  reducing  the  original 
amount  of  inflation,  the  considerations  which  have  been 
advanced  point  to  the  conclusion  that  while  the  amount 
of  excess  is  relatively  small,  there  is  undoubtedly  some 
inflation  in  the  securities  of  many  railroads,  and  in  the 
case  of  some,  such  as  the  Rock  Island,  the  Southern,  and 
the  Minneapolis  and  St.  Louis,  the  amount  is  considerable. 

Occasions  of  Inflation. — Advantage  has  been  taken  of 

333 


RAILROAD  FINANCE 

various  occasions  to  increase  the  par  value  of  liabilities 
without  regard  to  the  real  capital  of  the  corporation. 
"Writing  in  1869,  Mr.  Charles  Francis  Adams,  Jr.,  said: 

Almost  every  conceivable  vicissitude  of  railroad  fortune  has 
at  some  time  served  its  turn  as  an  excuse  for  stock  watering. 
Companies  have  watered  their  stock  because  they  were  rich  and 
had  a  surplus,  and  they  have  watered  it  because  they  were  poor 
and  could  not  make  dividends ;  they  have  watered  it  because 
they  did  not  have  stock  enough,  and  recently  Erie  has  been 
flooded  because  there  was  so  much  of  the  stock  that  more  made 
no  difference.  Stock  has  been  issued  because  roads  have  been 
subjected  to  opposition,  and  it  is  regularly  issued  because  they 
are  exempt  from  it.12 

Many  railroads  have  been  overcapitalized  at  the  outset 
by  issuing  liabilities  in  excess  of  the  investment  represented 
in  assets,  others  have  been  inflated  through  the  process  of 
consolidation,  but  probably  the  greatest  part  of  the  watered 
shares  now  outstanding  is  the  result  of  reorganization. 

The  methods  by  which  fictitious  capital  liabilities  have 
been  set  up  have  varied  with  individual  cases.  It  has  been, 
necessary  to  sell  bonds  at  a  discount  in  order  to  obtain 
capital  for  the  construction  of  new  lines  into  undeveloped 
country.  This  practice  may  not  be  open  to  criticism  as  a 
method  of  financing,  but  there  can  be  no  justification  for 
allowing  the  represented  cost  to  stand  as  a  reason  for 
charging  the  public  exorbitant  rates  for  the  use  of  the 
highway.  Nor  is  it  a  reason  for  deceiving  the  public  as  to 
the  value  of  securities.  Even  fron  the  standpoint  of  op- 
erating cost,  the  amount  of  the  discount  should  be  charged 
off  through  a  series  of  years.  Yet  this  has  not  been  gen- 
erally done;  nor  has  it  been  seriously  considered  in  the 
determination  of  what  it  is  proper  for  the  railroad  to  earn. 

Construction. — Allied  to  the  sale  of  bonds  below  par  is 
the   granting  of  the  share  bonus.     The  motive  in   either 

12  Adams,  "Railroad  Inflation,"  North  Amer.  Rev.,  CVIII,  139-40. 

334 


OVERCAPITALIZATION 

case  is  the  same — to  provide  a  market  for  the  bonds.  In 
practice,  the  share  bonus  has  been  one  of  the  most  effective 
instruments  of  the  speculative  builder,  who,  not  content 
with  normal  profits,  has  wished  to  share  in  the  prosperity 
resulting  from  the  activities  of  those  upon  whom  he  has 
unloaded  his  property.  But  the  railroad  promoter  has  not 
been  satisfied  with  the  profits  arising  from  the  use  of  any  one 
of  these  methods.  The  railroad  construction  company  has 
also  contributed  to  inflation  through  excessive  prices  for 
work  and  materials  supplied  under  contract.  A  similar 
method  has  been  the  acquisition  of  other  lines  of  railroad 
from  persons  connected  with  the  company,  who  by  virtue 
of  their  relation  have  acted  both  as  buyers  and  as  sellers. 
Evidence  of  this  practice  is  usually  difficult  to  obtain,  but 
that  it  has  been  often  followed  there  can  be  no  doubt.  On 
the  other  hand,  it  has  sometimes  been  good  policy  to  take 
over  the  control  of  another  railroad  at  prices  which  under 
ordinary  circumstances  would  be  justly  considered  excess- 
ive. In  the  purchase  of  equipment,  also,  there  is  oppor- 
tunity for  inflation.  A  railroad  will  order  cars  from  a 
builder,  who  in  turn  will  procure  his  castings  from  a 
foundry.  This  foundry  will  bill  the  car  builder  at  a  price 
set  by  the  railroad  and  then  return  as  a  rebate  to  the  rail- 
road the  difference  between  the  cost  of  the  cars  and  their 
value.  The  car  builder  in  turn  will  bill  the  railroad  or 
the  trustee  of  the  car  trust  securities  for  an  amount  to 
cover  this  fictitious  cost  plus  his  work  of  assembling.  The 
railroad  will  then  apply  the  rebate  to  the  credit  of  a  re- 
serve account,  instead  of  the  equipment  account.  The 
result  is  to  place  a  fictitious  value  upon  the  equipment. 

Reorganization. — The  substitution  of  a  large  amount  of 
low-grade  securities  for  a  small  amount  of  securities  of 
high  grade  has  been  the  most  common  form  of  stock-water- 
ing within  recent  years.  Usually  this  change  has  taken 
place  in  the  course  of  reorganization  proceedings,  the  un- 

335 


RAILROAD  FINANCE 

derljdng  purpose  being  to  conform  the  securities  to  the 
dictates  of  commercial  necessity  in  such  a  mancer  that 
present  sacrifices  may  be  eventually  made  good  out  of 
future  profits.  Thus  junior  bondholders  have  been  asked 
to  submit  to  a  reduction  in  the  rate  of  interest  on  the  prin- 
cipal, and  to  obtain  their  assent  a  return  in  the  form  of 
some  preferred  shares  and  a  large  amount  of  common 
shares  has  been  offered.  Instances  of  railroads  which  have 
inflated  the  par  value  of  outstanding  shares  through  proc- 
ess of  reorganization  are  furnished  by  the  Atchison,  the 
Baltimore  and  Ohio,  the  Erie,  and  the  Southern.  In  the 
case  of  the  Erie  and  of  the  Southern  as  well,  shares  were 
issued  upon  which  it  was  never  expected  dividends  would 
be  paid.  There  can  be  no  question  that  the  represented 
par  value  of  their  shares  should  not  be  considered  in  de- 
termining the  rates  for  service  to  the  public.  Judicial 
consideration  of  a  fair  return  on  investment  cannot  con- 
cern itself  with  the  practice  of  issuing  such  bonus  shares 
at  reorganization,  for  through  this  method  a  determination 
of  capital  assets  would  be  an  impossible  task. 

Inflation  of  capital  liabilities  maj^  also  be  brought  about 
through  the  substitution  of  securities  for  unsecured  or 
collateral  notes.  Thus  the  funding  of  the  floating  debt 
may  result  in  an  increase  of  the  amount  of  represented 
capital  liabilities  without  causing  an  increase  of  capital 
assets. 

Consolidation. — Consolidation  has  afforded  opportunity 
for  inflation  under  pretense  of  bringing  the  values 
of  the  shares  of  the  constituent  companies  to  a  basis 
of  equality.  At  the  organization  of  the  New  York 
Central,  the  par  value  of  capital  liabilities  of  the 
new  corporation  exceeded  the  aggregate  par  value  of 
capital  liabilities  of  the  constituent  companies  by  about 
fifty  per  cent.  In  the  same  way  the  capital  of  the  Lake 
Shore  and  Michigan  Southern  was  inflated.  Overcapital- 
ise 


OVERCAPITALIZATION 

ization  may  be  said  to  have  been  the  usual  accompaniment 
of  most  early  railroad  consolidations,  and  as  in  the  period 
of  industrial  consolidation  in  the  nineties,  inflated  securi- 
ties afforded  promoters  an  opportunity  to  obtain  their 
profits.  Yet  in  most  instances  the  railroads  which  have 
been  overcapitalized  in  this  manner  have  been  able  to  in- 
crease their  net  income  to  such  an  extent  as  to  pay  divi- 
dends and  bring  the  market  price  of  securities  up  to  par; 
and  in  many  instances  by  means  of  liberal  appropriation* 
of  earnings  to  betterments  and  additions  to  property,  they 
have  been  able  to  increase  their  capital  assets  correspond- 
ingly. It  is  interesting  in  this  connection  to  note  that  in 
the  article  of  Mr.  Adams,  to  which  reference  has  been 
made,  the  New  York  Central,  the  Lake  Shore,  the  Penn- 
sylvania, the  Pittsburgh,  Fort  Wayne,  and  Chicago,  and 
the  Chicago,  Burlington,  and  Quincy  railroads  were  cited 
as  examples  of  lines  which  were  grossly  overcapitalized. 
Such  a  charge  could  not  be  made  to-day. 

Within  recent  years  inflation  has  been  effected  through 
the  medium  of  the  holding  company.  By  this  device  it 
has  been  possible  to  issue  securities  in  amounts  limited 
only  by  the  desires  of  promoters.  The  Reading,  Southern 
Pacific,  Seaboard,  and  Rock  Island  companies  furnish  cases 
in  point. 

Share  Dividends. — The  issue  of  share  dividends  is  a 
time-honored  method  of  inflation.  Shares  may  be  issued 
in  this  manner  to  represent  legitimate  diversions  of  sur- 
plus earnings  to  betterments,  additions,  and  extensions. 
In  this  way,  also,  surplus  earning  power  may  be  capital- 
ized upon  the  principle  observed  in  private  business  enter- 
prises. The  well  known  case  of  the  Chicago  and  Alton,  in 
which  $120,000,000  of  securities  were  issued  to  represent 
an  actual  investment  of  only  one-third  that  amount,  may 
be  cited  again  as  an  illustration  of  the  extent  to  which 
financiers  have  gone  in  the  absence  of  legal  or  corporate 
23  337 


RAILROAD  FINANCE 

restraint.  A  common  motive  behind  the  share  dividend  is 
the  concealment  of  earnings  in  order  that  legislative  inter- 
ference with  transportation  charges  may  be  averted. 
Shares  have  been  issued  in  this  manner,  also,  for  purely 
speculative  purposes  by  directors  who  have  taken  advantage 
of  their  positions  to  enrich  themselves  at  the  expense  of 
those  whose  interests  they  were  elected  to  serve.  The  most 
glaring  instance  of  this  sort  is  undoubtedly  that  of  the 
New  York  Central  in  1868,  when,  at  a  special  meeting  of 
the  directors  held  at  midnight  at  the  residence  of  one  of 
the  New  York  directors,  a  dividend  of  eighty  per  cent,  in 
shares  and  four  per  cent,  in  cash  was  declared.  This  in- 
creased the  represented  capital  liabilities  by  $22,500,000. 
As  the  shares  of  this  company  had  been  depressed  in  the 
market  for  some  time  prior  to  the  announcement  of  this 
action,  a  speculative  clique  composed  mainly  of  directors 
was  enabled  to  buy  large  blocks  of  shares  upon  which  great 
profits  were  realized  by  the  holders,  but  with  no  benefit  to 
the  corporation  and  with  no  regard  for  the  interest  of  the 
public. ^^ 

Represented  capital  liabilities  may  be  inflated,  also, 
through  an  issue  of  script  conveying  to  shareholders  the 
right  to  subscribe  to  new  shares,  but  only  in  case  the  privi- 
lege to  subscribe  be  offered  below  par.  By  this  method 
the  surplus  is  represented  in  capital  liabilities  at  an  amount 
in  excess  of  capital  assets  by  the  amount  of  the  discount. 
In  1900  the  Baltimore  and  Ohio  offered  new  shares  to 
shareholders  at  eighty  cents  on  the  dollar. 

Urging  vested  interest  as  a  basis  of  appraisement,  it  is 
sometimes  claimed  that  the  investment  of  the  holder  of 
capital  liabilities  is  the  amount  which  he  paid  on  the  mar- 
ket, and  not  the  amount  which  the  corporation  received 
from  the  original  contribution  of  capital.  Such  a  method 
of  reasoning  cannot  be  allowed  to  prevail  without  defeat- 
is  Commercial  and   Financial   Chronicle,   VII,   813-4, 

338 


OVERCAPITALIZATION 

ing  the  purpose  of  the  valuation.  The  price  paid  by  the 
present  holders  may  have  been  speculative ;  it  may  have 
been  several  times  that  originally  paid  to  the  corporation ; 
or  it  may  have  been  much  less. 

Results  of  Fictitious  Capitalization. — The  question  of 
overcapitalization  is  one  which  is  of  interest  from  the  stand- 
point of  the  shipper,  the  investor,  and  the  public.^*  There 
is  a  wide  difference  of  opinion  as  to  the  effect  of  fictitious 
capitalization  upon  rates.  It  is  held  by  many  that  rail- 
roads tax  the  shipper  to  pay  dividends  on  watered  stock, 
but  of  this  contention  President  Hadley  has  said :  "  Of  all 
the  charges  against  the  railroads  this  is  the  most  popular; 
yet  it  is  one  which  has  the  least  foundation."  ^^'  Similar 
opinions  are  held  by  Mr.  Thomas  F.  Woodlock,^''  and  by 
other  financial  writers  of  prominence.  Judge  IMartin  A. 
Knapp,  former  chairman  of  the  interstate  commerce  com- 
mission, maintains  that  overcapitalization  has  no  relation 
to  the  subject  of  discriminatory  rates  on  competitive  lines, 
but  when  it  comes  to  the  determination  of  what  constitutes 
a  rate  which  shall  be  fair  in  itself,  or  a  proper  charge  for 
non-competitive  traffic,  he  admits  that  the  question  of  rep- 
resented capitalization  in  its  relation  to  fair  valuation  of 
assets  must  be  considered. ^^  This  need  not  differ  materi- 
ally from  the  view  of  Hadley  and  of  Woodlock.  A  more 
adequate  statement  of  the  case  has  been  given  by  Doctor 
William  Z.  Ripley,  who  says: 

14  This  was  hardly  the  opinion  of  Sidney  Dillon,  who  said:  "As 
a  matter  of  reason  and  principle,  the  question  of  capitalization  con- 
cerns the  stockholders,  and  the  stockholders  only.  A  citizen,  sim- 
ply as  a  citizen,  commits  an  impertinence  when  he  questions  the 
right  of  any  corporation  to  capitalize  its  properties  at  any  sum 
whatever." — "The  West  and  the  Railroads,"  North  Amer.  Rev.,  CLII, 
440.  We  have  made  some  progress,  it  seems,  since  the  time  when 
such   views  were  given  serious  consideration. 

i-*"'  Hadley,  "Railroad  Ahuses  at  Home  and  Abroad,"  Neio  Prince- 
ton   Rev.,    II,   .359. 

18  Report  of  the  industrial  commission,  IX,  450-7. 

i7/6td.,  IX,  144. 

339 


RAILROAD  FINANCE 

But  indirectly,  capital  does  have  some  connection  with  rates, 
Fn  the  long  run  excessive  capitalization  tends  to  keep  rates  high ; 
conservative  capitalization  tends  to  make  rates  low.  Rates 
.  .  .  are  governed  by  "what  the  traffic  will  bear."  An  im- 
portant element  in  determining  what  the  traffic  will  bear  is  the 
pressure  of  competition,  where  it  exists.  Two  kinds  of  compe- 
tition are  to  be  distinguished  here,  which  have  been  termed  re- 
spectively direct  and  indirect  competition.  Direct  competition  1? 
that  between  lines  covering  the  same  territory  or  connecting  the 
same  terminals:  indirect  competition  takes  place  between  roads 
having  no  territory,  in  common,  but  serving  producers  who  are 
competing  for  the  supply  of  the  same  markets.  .  .  .  This 
sort  of  indirect  competition  in  the  distribution  of  products  puts 
a  certain  check  upon  rates,  even  where  direct  competition  is  en- 
tirely absent.  Where  competition  of  either  kind  exists,  rates  are 
not  dominated  by  the  amount  of  capitalization.  But  competi- 
tion in  either  form  is  not  always  present.  Where  it  is  absent, 
overcapitalization  with  high  fixed  charges  and  dividend  require- 
ments may  lead  to  the  raising  of  rates  above  the  amount  that 
would  give  reasonable  returns  upon  the  actual  investments. 
High  capitalization  tends,  moreover,  to  keep  up  rates  by  pre- 
venting voluntary  concessions  which  might  otherwise  have  taken 
place.  A  company  paying  high  dividends  may  find  it  expedient 
to  lower  its  rates  in  order  that  the  appearance  of  exorbitant 
profits  may  not  excite  a  hostile  public  opinion.  But  if  returns 
from  excessive  rates  can  be  distributed  in  dividends  on  watered 
capital,  the  public  is  not  aroused  to  demand  reductions.  High 
capitalization,  therefore,  has  at  least  an  indirect  bearing  on  rates. 
The  amount  of  railroad  capital  is  not  to  be  regarded  as  a  matter 
of  no  concern  to  shippers.is 

Thomas  L,  Greene  also  assumed  that  the  public  had  some 
interest  in  the  matter,  saying:  ''What  the  community  has 
lost  in  freights  and  facilities,  through  the  efforts  of  the 
managers  to  pay  dividends  on  doubled  capital  at  a  ratf- 
which  should  nominally  be  as  high  as  the  usual  interest  on 
borrowed  money,  can  only  be  a  matter  of  conjecture."^* 
The  amount,  in  his  opinion,  however,  was  small.     But,  as 

IS  Ibid.,  XIX,  414-5. 

19  Greene,  "Corporation  Finance,"  139. 

340 


OVERCAPITALIZATION 

he  pointed  out,  the  shipping  public  is  concerned  not  only 
with  fair  rates  but  with  adequate  facilities  as  well.  Here, 
again,  overcapitalization  has  an  evil  effect.  "When  a  de- 
cline in  profit  comes,  stock-watering  has  a  direct  effect. 
The  managers,  knowing  that  a  reduction  in  the  dividend 
rate  .  .  .  will  be  very  unpopular,  strive  in  every  way, 
legitimately  and  illegitimately,  to  continue  the  old  pay- 
ments. They  will  withdraw  trains,  will  discharge  em- 
ployees, will  buy  less  supplies,  and  in  every  way  will  en- 
deavor to  increase  their  net  earnings  up  to  the  former 
amount,  with  the  result  that  the  public  are  deprived  of 
facilities  to  which  they  are  entitled  and  which  they  might 
otherwise  obtain. ' '  -° 

Whatever  difference  of  opinion  there  may  be  as  to  the 
effect  of  inflation  upon  the  shipper,  there  is  general 
agreement  as  to  the  wrong  it  may  do  the  investor.  Thus 
President  Hadley  says: 

The  worst  of  the  matter  is  that  when  the  pi'aetice  of  stock- 
watering  once  becomes  tolerated  it  is  definitely  abused  by  those 
who  are  in  a  position  to  do  so.  If  companies  begin  to  issue 
fictitious  capital  there  is  no  limit  to  such  issues.  A  false  capital 
account  gives  opportunity  for  every  kind  of  stock-speculation  and 
for  all  sorts  of  illegitimate  methods  of  control  by  financial  op- 
era tors.21 

This  was  also  the  opinion  of  Greene,  who  said: 

Another  objection  to  stock-watering  is  that  while  it  provides 
a  method  by  which  capitalization  and  profits  may  correspond- 
ingly increase,  it  affords  no  means  of  registering  a  decline  in 
those  profits,  for  shares  once  issued  cannot  readily  be  found  and 
called  in.  In  speculative  America  fluctuations  in  business  profits 
are  to  be  expected,  and  one  of  the  embarrassing  things  in  Wall 
Street  is  the  presence  there  of  shares  having  little  or  no  in- 
trinsic value,  but  which  may  be  used  by  unscrupulous  and  some- 
times almost  pennile.ss  adventurers  to  obtain  possession  of  a  rail- 

2o/6id.,   141-2. 

21  Hadlev,  "Economics,"   168. 

341 


RAILROAD  FINANCE 

way  or  other  company.  The  temptation  in  such  cases  is  great, 
for  the  men  thus  placed  in  control  to  recoup  themselves  in  some 
way  for  the  cost  of  purchasing  that  control.  Low-priced  stocks 
cannot,  of  course,  be  avoided,  but  their  number  might  be  largely 
decreased  if  we  could  remove  from  the  exchange  those  shares 
which  represent  "water"  principally,  and  which  have  fallen  be- 
low the  expectations  of  optimistic  stock-waterers.  .  .  .  An 
unreal  prosperity  may  be  brought  about  through  an  illegitimate 
curtailing  of  expenses  and  in  other  ways,  so  that  an  extra  issue 
of  stock  may  falsely  be  made  to  seem  justifiable  on  grounds  of 
large  but  fair  profits.  Or  honest  prosperity  may  come  up  quickly 
to  fall  as  quickly.  In  either  case,  whether  through  fraud  or 
error,  the  increase  of  capital  stock  may  be  commercially  un- 
warranted and  a  source  of  loss  to  innocent  investors.  Again, 
parties  in  control  of  a  railroad  or  other  large  corporation  owning 
comparatively  few  shares,  may  decide  suddenly  to  distribute 
new  shares  free,  and,  by  taking  advantage  of  their  exclusive 
information,  may,  if  unrestrained,  make  large  sums  of  money 
for  themselves.  Or,  further,  a  company's  directors,  to  perpetu- 
ate their  control,  may  issue  new  shax'es  to  themselves  at  merely 
the  cost  and  trouble  of  buying  old  shares  on  a  margin.  This 
may  result  in  giving  over  to  men  not  equitably  the  real  owners, 
the  management  of  an  important  property.  Such  control  is  not 
likely  to  be  exercised  for  the  public  good,  but  rather  for  specula- 
tive purposes.  Such  stock-watering  as  this  is  an  abuse  of  the 
principles  of  good  corporation  finance,  against  which  it  is  the 
right  of  the  state  to  protect  itself  by  all  legitimate  means.22 

Professor  Ripley  says  of  the  evils  of  overcapitalization : 

It  invites  unearned  profits  on  the  part  of  promoters  leading 
to  corpoi'ate  organization  or  financial  readjustment  in  unneces- 
sary or  unmerited  instances.  It  stimulates  extravagance  on  the 
part  of  banking  syndicates  in  the  prices  offered  or  paid  for 
Constituent  companies.  It  facilitates  internal  mismanagement, 
even  promotes  actual  fraud,  by  the  ease  with  which  the  most 
alert  stockholders  may  be  confused  as  to  the  real  standing  of 
their  own  company.  And  finally,  it  invites  speculation  and  stock 
market  jobbing  among  the  public  by  the  relatively  small  capital 
necessary  to  deal  in,  or  acquire  control  of,  considerable  blocks 
of  stock.  ...  In  most  cases,  probably,  the  evils  ascribed  to 
overcapitalization  are  merely  concomitant  rather  than  resultant. 

22  Greene,  140-1,  143. 

342 


OVERCAPITALIZATION 

In  other  words,  overcapitalization  is  often  merely  an  indication 
of  financial  recklessness,  which  makes  itself  known  coincidently 
in  other  phases  of  corporate  conduct.23 

He  also  points  out  as  a  fundamental  evil  of  overcapital- 
ization "the  absence  of  adequate  security,  first,  for  the 
creditor,  and  secondly,  for  the  shareholder";  adding  that 
"it  is  obvious  that  borrowing  capacity,  while  dependent 
upon  current  revenue  for  its  interest,  must  ultimately  rest 
upon  the  attachable  property  for  final  security."-*  This 
suggests  that  receivership  may  have  more  than  a  remote 
connection  wdth  overcapitalization,  for  an  overloaded  prop- 
erty must  necessarily  have  more  difficulty  in  extending  its 
loans  than  one  against  which  only  a  moderate  amount  of 
securities  is  outstanding.  If  the  time  for  renewing  its 
loans  should  fall  in  a  period  of  financial  stringency,  re- 
course to  the  courts  is  imperative.  The  cases  of  the  Chi- 
cago Great  Western,  and  the  Seaboard  Air  Line,  both  in 
1908,  may  be  cited  in  this  connection. 

The  privilege  of  issuing  securities  without  limit,  either 
coupled  with  the  public  subsidy  abuse  or  alone,  has  acted 
as  an  incentive  to  the  construction  of  much  unnecessary 
mileage.  It  is  true  that  railroads  extended  into  undevel- 
oped territory  usually  became  paying  properties  after  a 
time,  but  it  is  also  true  that  if  construction  could  have 
proceeded  with  less  speed,  the  public  would  have  been  bet- 
ter served,  and  investors  saved  much  loss.  As  to  such  rail- 
roads as  the  West  Shore,  "Nickle  Plate,"  and  Chicago 
Great  Western,  it  would  be  difficult  to  discover  a  legiti- 
mate reason  why  they  should  ever  have  been  built. 

Inconsistency  of  Public  Attitude. — In  its  attitude  to- 
ward the  matter  of  railroad  capitalization  the  public  has 
been  inconsistent,  and  it  is  undoubtedly  true  that  the  re- 


23  Ripley,  "Trusts,  Pools  and  Corporations,"  .\xiii-xxiv. 
34  Ihid.',   125. 

343 


RAILROAD  FINANCE 

suit  has  been  an  increase  of  the  evil  of  stock-watering. 
By  attempting  to  limit  both  the  amount  of  the  returns 
:vvhich  a  railroad  may  pay  to  shareholders,  and  the  amount 
iof  capital  liabilities   which  it  may  issue,  the  public  has 
allowed  its  prejudice  to  defeat  its  own  ends.     "By  this 
prejudice  against  high  dividends,"  according  to  Greene, 
"the  public  is  itself  mainly  responsible  for  such  issues  of 
unpaid   stocks  as  are  made  to  conceal  the   fact  that  the 
earnings  are  larger  than  the  usual  rates  of  interest,  and 
thus,  also,  it  often  comes  about  that  the  public  deprives 
itself  of  a  certain  natural  protection  against  unfair  or  in- 
equitably fair  earnings,  which  if  openly  paid  might  attract 
competition   through   the  openly   displayed   possibility   of 
large .  profits.     Such  restrictions  upon  dividends  do  some- 
times affect  the  number  of  improvements  made  in  prop- 
erty or  in  train  service  by  turning  to  betterments  funds 
which  would  otherwise  be  distributed  to  stockholders,  but 
this  is  the  utmost."'^     Again,  "Public  opinion  still  insists 
that  the  rates  of  dividends  paid  by  corporations  shall  be 
measured,  as  to  their  fairness,  by  the  ruling  rate  of  in- 
terest on  borrowed  money.     It  is  constantly  said  that  five 
or  six  per  cent,  annual  returns  on  the  share  capital  of  a 
company  is  all  that  should  be  paid,  since  about  that  per- 
centage is  the  normal  yield  on  bonds  or  commercial  paper 
or  paid  on  notes  discounted  at  the  banks.     It  is  overlooked 
that  the  standard  thus  set  is  the  rate  on  money  loaned  on 
good  collateral,  and  considered  secure  both  as  to  interest 
and  principal.     The  comparison  may  be  proper  as  between 
the  prevailing  rate  of  interest  and  that  paid  by  the  com- 
pany on  its  bonds ;  but  manifestly  the  returns  on  that  part 
of  the  capital  hazarded  by  the  shareholders  should  not  be 
so  judged.     .     .     .     The  remedy  for  stock-watering,  there- 
fore, even  in  its  innocent  form,  is  not  additional  law,  but 
a  change  in  public  opinion,  which  shall  allow  the  payment 
25  Greene,  "Railroad  Stock-watering,"  Pol.  8ci.  Quar.,  VI,  480-1. 

344 


OVERCAPITALIZATION 

of  ten,  twelve,  or  fifteen  per  cent,  if  legitimately  earned, 
to  the  shareholders  of  corporations. ' '  ^® 

Such  a  contention  is  not  without  force ;  but  it  cannot  be 
too  often  reiterated  that  our  railroads  have  been  built 
largely  out  of  the  proceeds  of  their  bonds,  and  that  in 
states  where  railroad  construction  has  proceeded  on  a  share 
capital  basis,  the  risk  has  been  small  and  the  dividends 
have  been  generally  at  a  higher  rate  than  has  been  re- 
ceived on  secured  loans.  It  is  not  that  the  public  has 
objected  to  a  high  return  upon  shares  which  represent  cor- 
responding value  in  assets,  or  the  possession  by  the  man- 
agement of  qualities  of  foresight  and  prudence,  but  so 
numerous  and  so  flagrant  have  been  the  instances  of  abuse 
by  railroad  directors  of  their  position  of  monopoly  ad- 
vantage over  the  public  and  their  secret  advantage  over 
investors  themselves  that  radical  and  futile  restrictive 
legislation  might  have  been  expected  as  a  natural  conse- 
quence. 

State  Regulation  of  Issuance  of  Securities. — Notwith- 
standing the  obvious  need  for  laws  imposing  effective  re- 
straint upon  the  issue  of  securities,  the  confusion  of  the 
public  mind  upon  the  subject  has  been  such  as  to  reflect 
itself  in  either  inadequate  measures  on  the  one  hand,  or 
drastic  restrictions  on  the  other.  Many  of  the  states  have 
made  no  attempt  whatever  in  this  direction. 

Although  the  railroads  of  Massachusetts  were  conserva- 
tively financed  at  the  time  of  construction,  the  frequent 
issue  of  large  blocks  of  new  securities  led  the  legislature 
to  adopt  a  restrictive  policy  in  1894.  At  that  time  the 
issue  of  share  or  script  dividends  was  forbidden,  as  was 
also  the  issue  of  any  securities  except  for  cash;  and  the 
distribution  among  shareholders  of  the  proceeds  of  a  new 
issue  of  securities.-^  It  was  further  enacted  that  a  rail- 
road   might    increase    its    capital    liabilities    beyond    the 

26  Greene,  "Corporation  Finance,"  139.  27  L.  1894,  c.  350. 

345 


RAILROAD  FINANCE 

amount  allowed  by  its  charter  only  upon  the  consent  of 
the  board  of  railroad  commissioners,  and  the  amount  of  the 
increase  was  left  to  the  decision  of  the  board  after  a  hear- 
ing. New  shares  were  first  offered  to  existing  shareholders 
at  a  price  not  lower  than  the  market  value  of  the  old 
shares  at  the  time  the  increase  was  determined  upon,  but 
it  was  for  the  board  to  declare  what  this  price  should  be. 
Except  in  amounts  of  less  than  four  per  cent,  of  its  capitali- 
zation, a  corporation  was  to  sell  at  auction  shares  for 
which  there  was  no  demand  from  existing  shareholders; 
and  no  shares  might  be  sold  for  less  than  par  value.^* 
Meanwhile,  the  old  law  limiting  the  dividends  on  shares 
to  ten  per  cent,  continued  in  force.  Similar  laws  were  also 
enacted  in  Maine,-®  and  in  New  Hampshire.^" 

A  special  commission  on  commerce  and  industry  re- 
ported in  1908  that  the  anti-stock-watering  law  of  Massa- 
chusetts defeated  its  own  purpose,  and  tended  to  discour- 
age the  investment  of  capital  in  Massachusetts  railroads. 
It  attacked  the  principle  of  the  law,  holding  that  when  the 
state  prescribed  a  price  above  par  as  a  minimum  basis  on 
which  new  shares  might  be  offered,  it  thereby  limited  itself 
in  subsequent  efforts  to  determine  the  fairness  of  returns 
upon  investment  in  railroad  shares,  for  it  could  not  with 
fairness  refuse  to  allow  a  return  upon  the  basis  which  it 
had  already  established  in  its  own  interest.  The  commis- 
sion declared,  moreover,  that  the  public  is  mainly  con- 
cerned with  the  maintenance  of  satisfactory  service  at 
reasonable  rates,  and  not  with  the  earnings  of  the  rail- 
roads. It  therefore  condemned  the  policy  of  limiting 
profits,  so  long  as  rates  and  service  remain  satisfactory.^^ 

28  L.  1894,  c.  462,  472,  502;  also  L.  1897,  c.  337.  See  also  Bul- 
lock, "Control  of  Capitalization  of  Public  Service  Corporations  in 
Mass.,"  Amer.  Econ.  Assoc,  Quarterly   (3  ser.),  X,  384-414. 

29  L.   1897,  c.  180;   amended  1901,  c.  173. 

30  L.  1897,  c.  19,  amended  1901,  c.  42,  and  repealed  L.  1911,  c. 
164. 

31  Commission  on  Commerce  and  Industry,  Report,  57-69. 

346 


OVERCAPITALIZATION 

In  1908  the  legislature  modified  the  law  by  providing  that 
new  issues  of  shares  may  be  offered  to  shareholders  at  such 
price  not  less  than  par  as  the  shareholders  themselves  may 
determine,  subject  to  the  approval  of  the  railroad  commis- 
sioners. This  price  need  be  no  longer  fixed  with  reference 
to  any  assumed  ' '  market  value, ' '  and  the  board  of  railroad 
commissioners  is  given  full  discretion  to  determine  whether 
it  is  so  low  as  to  be  inconsistent  with  the  public  interest.^^ 
New  Hampshire's  public  service  commission  act  of  1911 
contains  a  similar  provision.^^ 

The  state  of  Texas  took  action  in  1893  to  limit  the 
amount  of  new  securities  which  might  be  issued  by  rail- 
road corporations  by  requiring  that  the  amount  of  out- 
standing capital  issues  should  not  exceed  the  ''reasonable 
value"  of  the  railroad  property,  as  determined  by  the  rail- 
road commission.^*  This  law  could  have  no  effect  upon 
the  securities  outstanding  at  the  time  of  its  enactment, 
except  in  the  case  of  bonds  which  it  is  desired  to  refund, 
but  it  imposed  an  effective  restraint  upon  the  securities 
which  could  be  issued  to  finance  the  construction  of  exten- 
sions and  new  lines.  Because  of  this  law  the  outstand- 
ing securities  of  Texas  railroads  were  reduced  from 
$40,802  per  mile  in  1894  to  $31,530  per  mile  in  1906. 
During  this  period  the  mileage  in  the  state  increased 
twenty-five  per  eent.^^  This  law  imposed  considerable 
hardship  upon  the  older  companies  which  had  outstanding 
an  excessive  amount  of  securities,  for  it  effectually  pre- 
vented the  financing  of  extensions.  It  was  modified  in 
1901  when  the  railroad  commission  was  authorized  to  ig- 
nore the  amount  of  securities  issued  on  the  old  line  in  de- 

32  L.    1908,  c.   636;    also  c.   620.     See  also  Calkins,   "The  Massa- 
cluisetts  Anti-stock  Watering  Law,"  Quar.  Jour.  Econ.,  XXII,  640-5. 
^^L.  1!)11,  c.  164. 

34  L.  18!)3,  c.  50. 

35  Miller,  "The  Texas  Stock  and  Bond  Law  and  its  Administration," 
Quar.  J  out.  of  Econ.,  XXll,  109-19. 

347 


RAILROAD  FINANCE 

termining  the  validity  of  a  proposed  issue  for  an  exten- 
sion.^^ 

New  York  in  1889  and  1890  gave  its  board  of  railroad 
commissioners  full  authority  over  the  issue  of  new  securi- 
ties, and  in  the  public  service  law  of  1907  provided  that  the 
public  service  commissions  created  by  that  act  should  have 
authority  to  Avarrant  the  issue  by  a  public  service  corpora- 
tion of  such  an  amount  of  securities  (except  those  issued 
for  less  than  one  year)  as  it  might  find  to  be  reasonably  re- 
quired for  the  purposes  of  the  corporation.  This  law  also 
specifically  requires  that  the  securities  issued  by  a  cor- 
poration formed  by  the  consolidation  of  two  or  more 
corporations  shall  not  exceed  the  aggregate  amount  of  their 
securities.^"  These  provisions  of  the  New  York  law  have 
been  essentially  reproduced  in  a  Wisconsin  law  of  the 
same  year,^®  in  a  Nebraska  law  of  1909,^®  and  in  the  ]\Iary- 
land  public  service  commission  law  of  1910.'*"  Georgia/^ 
Kansas,*-  New  Jersey,*^  Ohio,"  and  Vermont  *^  also  have 
given  their  commissions  jurisdiction  over  the  issue  of  rail- 
road securities.  Iowa  railroads  may  issue  securities  only 
with  the  consent  of  the  executive  council.**'  Arizona  has 
forbidden  railroads  to  issue  bonds  in  excess  of  their  author- 
ized share  capital.*^ 

The  right  of  a  state  legislature  to  delegate  to  a  commis- 
sion authority  to  regulate  the  increase  of  railroad  capital 
has  been  assailed  in  several  instances,  but  never  success- 
fully, except  in  Minnesota,  where  the  supreme  court  in 
1907  declared  unconstitutional  such  a  delegation  of  full 

36  L.  1901,  c.  91. 

37  L.  1907,  c.  429,  §  55.         "  l.  1911:  549. 

38  L.  1907,  c.  576.  '  *^  L.   1907,  c.  71. 

39  L.  1909,  c.  108.  47  L.  1905,  c.  42. 

40  L.  1910,  c.  180. 

41  L.  1907,  no,  223. 

42  L.  1911,  c.  238. 

43  L.  1911,  c.  195. 

45  L.  1906,  no.  126;  amended  1908,  no.  116. 

348 


OVERCAPITALIZATION 

discretionary  powers  to  the  railroad  and  warehouse  com- 
mission of  that  state.*^ 

Regulation  hy  Interstate  Commerce  Commission. — In 
keeping  with  the  general  extension  of  the  range  of  con- 
gressional control  over  the  affairs  of  railroads,  it  has  been 
proposed  to  give  to  the  interstate  commerce  commission 
authority  to  regulate  the  issue  of  securities  by  railroads 
engaged  in  interstate  commerce.  According  to  this  plan, 
before  a  railroad  could  increase  its  capital,  it  would  have 
to  obtain  a  certificate  that  the  securities  are  issued  with  the 
approval  of  the  commission  and  for  a  legitimate  railroad 
purpose.  The  official  recommendation  of  the  president 
was  as  follows : 

I  recommend  the  enactment  of  a  law  providing  that  no  railroad 
corporation  subject  to  the  interstate  commerce  act  shall  here- 
after for  any  purpose  connected  with  or  relating  to  any  part  of 
its  business  governed  by  said  act,  issue  any  capital  stock  without 
previous  or  simultaneous  payment  to  it  of  not  less  than  the 
par  value  of  such  stock,  or  any  bonds  or  other  obligations  (except 
notes  maturing  not  more  than  one  year  from  the  date  of  their 
issue),  without  the  previous  or  simultaneous  payment  to  such 
corporation  of  not  less  than  the  par  value  of  such  bonds,  or 
other  obligations,  or,  if  issued  at  less  than  their  par  value,  then 
not  without  such  payment  of  the  reasonable  market  value  of 
such  bonds  or  obligations  as  ascertained  by  the  Interstate  Com- 
merce Commission  ;  and  that  no  property,  services,  or  other  thing 
than  money,  shall  be  taken  in  payment  to  such  carrier  corpora- 
tion, of  the  par  or  other  required  price  of  such  stock,  bond,  or 
other  obligation,  except  at  the  fair  value  of  such  property,  serv- 
ices, or  other  thing  as  ascertained  by  the  commission ;  and  that 
such  act  shall  also  contain  provisions  to  prevent  the  abuse  by 
the  improvident  or  improper  issue  of  notes  maturing  at  a  period 
not  exceeding  twelve  months  from  date,  in  such  manner  as  to 
commit  the  commission  to  the  approval  of  a  larger  amount  of 
stock  or  bonds  in  order  to  retire  such  notes  than  should  legiti- . 
mately  have  been  required. 

Such  act  should  also  provide  for  the  approval  by  the  Interstate 

48  L.  1887,  c.  265;  State  v.  Great  Northern,  100  Minn.,  445. 

349 


RAILROAD  FINANCE 

Commerce  Commissiou  of  the  amount  of  stock  and  bonds  to  be 
issued  by  any  railroad  company  subject  to  this  act  upon  any 
reorganization,  pursuant  to  judicial  sale  or  other  legal  proceed- 
ings, in  order  to  prevent  the  issue  of  stock  and  bonds  to  an 
amount  in  excess  of  the  fair  value  of  the  property  which  is 
the  subject  of  such  reorganization. 

I  believe  that  these  suggested  modifications  in  and  amend- 
ments to  the  interstate  commerce  act  would  make  it  a  complete 
and  effective  measure  for  securing  reasonableness  of  rates  and 
fairness  of  practices  in  the  operation  of  interstate  railroad  lines, 
without  undue  preference  to  any  individual  or  class  over  any 
others ;  and  would  prevent  the  recurrence  of  many  of  the  prac- 
tices which  have  given  rise  In  the  past  to  so  much  public  in- 
convenience and  loss.49 

Argument  in  Favor  of  Federal  Regulation. — Experience 
has  already  proved  that  a  certificate  of  a  responsible  com- 
mission serves  to  strengthen  the  credit  of  a  corporation 
and  so  enable  it  more  easily  to  finance  an  issue  of  new 
securities.  Furthermore,  the  fact  that  it  may  become  im- 
possible to  inflate  securities  should  increase  the  attractive- 
ness of  existing  securities  by  tending  to  increase  their 
relative  earning  power.  With  new  construction  capital- 
ized at  its  cost,  the  employment  of  capital  in  railroads  must 
be  retarded,  but  as  the  new  mileage  will  be  better  built, 
the  average  capitalization  will  tend  to  fall.  The  argument 
that  this  new  attitude  of  government  toward  the  railroads 
is  hostile  to  sound  business  interests  has  been  effectually 
refuted  in  the  following  terms  by  a  competent  spokesman 
of  this  and  of  the  preceding  federal  administration : 

These  laws,  rightly  seen,  mean  a  sounder,  stronger  and  more 
widely  diffused  prosperity  for  the  real  corporate  interests, 
namely,  the  owners  of  the  railroad  shares  and  securities.  .  . 
Surely  investors  will  buy  bonds  which  represent  one  hundred 
per  cent,  of  their  face  value  in  actual  increase  of  the  value  of 
the  property   more  readily  than   bonds  which  only  enhance   the 

49  Message  of  William  H.  Taft,  Jan.  7,  1910,  Cong.  Record,  XLV, 
461. 

350 


OVERCAPITALIZATION 

socnrity  sixty,  seventy,  or  even  eighty  per  cent,  of  the  increase 
in  liabilities.  Surely  stocl^holders  will  find  more  satisfaction  in 
their  property,  if  it  is  not  burdened  with  charges  to  pay  interest 
on  twenty  or  thirty  per  cent,  of  bogus  indebtedness.  Surely  the 
great  body  of  industry  will  be  less  provoked  to  enmity  if  their 
traffic  is  not  tailed  upon  to  pay  fixed  charges  on  that  element  of 
pure  inllation.  It  is  as  much  to  the  interest  of  the  security 
holders  that  favoritism  in  rates  and  the  fiat  quality  in  capitaliza- 
tion shall  be  prevented,  as  it  is  to  the  interest  of  the  public 
that  railroad  capital  shall  earn  a  fair  return  on  actual  and  un- 
intiated  investment.  Railroad  revenues  cannot  attain  their 
broadest  and  most  stable  dimensions  when  dwarfed  and  di- 
verted by  these  abuses ;  nor  can  the  wide  increase  of  transporta- 
tion facilities  needed  by  growing  commerce  be  secured,  unless 
it  offers  to  the  investment  of  actual  capital  an  adequate  and 
reasonably  assured  return.  Legislation  conceived  and  executed 
in  the  unchangeable  resolution  to  maintain  justice  and  honesty 
for  and  against  all  classes  alike  is  beneficial  for  all  alike,  and 
establishes  the  foundation  for  the  widest  and  most  permanent 
national  prosperity. so 

Railroad  Securities  Commission. — Congress  did  not  see 
fit  to  adopt  this  policy,  but  instead  authorized  the  appoint- 
ment of  a  special  commission  to  investigate  the  subject. 
The  report  of  this  commission  declares  that  for  the  pres- 
ent it  would  be  impracticable  to  place  the  issuance  of  se- 
curities under  federal  control,  since  railroad  corporations 
are  already  subject  to  state  authority  in  this  particular, 
and  additional  national  restriction  would  only  tend  to 
create  further  confusion.  It  recommends  the  adoption  of 
stringent  provisions  for  thoroughgoing  publicity  as  the 
most  effective  means  of  control  which  the  national  govern- 
ment has  at  its  immediate  command.  But  it  points  out, 
also,  that  additional  legislation  will  be  needed  in  the  future 
to  provide  a  remedy  from  the  conditions  resulting  from  the 
dual  system  of  control  of  railroads  by  state  and  national 
governments,  and  from  the  conflict  between  the  laws  of 

60  Knox,  "The  People,  the  Railroads,  and  the  National  Authority," 
Albany  Law  Jour.,  LXX,  147-8.     (1908.) 

351 


RAILROAD  FINANCE 

the  different  states.  It  recommends,  therefore,  that  the 
states  should  immediately  attempt  to  harmonize  existing 
requirements  and  that  for  the  future  congress  should  care- 
fully consider  the  preparation  of  a  permissive  national  in- 
corporation act  in  order  that  the  proper  regulation  of  the 
issuance  of  railroad  securities  may  be  ultimately  estab- 
lished. 

Full  Puhlicity  Recommended. — As  a  means  of  insuring 
full  publicity,  the  commission  recommends  that  railroads 
should  be  required  by  statute  to  furnish  the  interstate; 
commerce  commission  with  a  detailed  statement  of  securi- 
ties which  they  issue,  the  amount  of  the  proceeds  and  the 
purpose  for  which  they  are  to  be  used,  with  a  subsequent 
accounting  for  such  proceeds  in  such  manner  that  the  di- 
rectors may  be  held  responsible  for  their  proper  use.  It 
also  recommends  that  the  interstate  commerce  commission 
be  endowed  with  ample  inquisitorial  powers  to  enable  it  to 
verify  these  statements,  and  with  authority  and  means  for 
the  determination  of  the  physical  valuation  of  railroads  as 
one  element  in  ascertaining  fair  value,  whenever  the  com- 
mission shall  consider  it  advisable  to  do  so.  Here  is  a 
plan  which  is  neither  radical  nor  unduly  conservative,  but 
definite  as  far  as  the  complexity  of  the  situation  allows 
and  capable  of  practical  application  without  injury  to  the 
public,  the  railroads,  or  investors  in  railroad  securities. 


CHAPTER  XVIII 

BIBLIOGRAPHY 


In  so  far  as  there  may  be  said  to  be  a  literature  of  railroad 
finance,  it  is  to  be  found  largely  beyond  the  range  of  specific 
titles,  in  writings  in  allied  fields  of  inquiry  and  in  documentary 
sources.  The  subject  has  been  treated  in  monographs  or  special 
treatises  dealing  with  corporate  operations  and  investments ; 
railroad  construction,  operation,  and  regulation ;  financial  and  in- 
dustrial history ;  and  in  discussions  bearing  upon  questions  of 
public  policy,  legislation,  and  judicial  decision.  Source  material 
and  miscellaneous  data  of  more  or  less  value  may  be  found  in 
a  great  number  and  variety  of  places.  In  consequence,  any  bibli- 
ography approaching  completeness,  if  its  compilation  were  not 
admittedly  impossible,  would  be  so  unwieldly  as  to  be  of  little 
practical   value. 

Bibliographical  Aids. — There  is  a  dearth  of  bibliographical  ma- 
terial upon  the  subject,  but  there  are  several  catalogues  and 
lists  which  serve  as  useful  guides.  Of  these  the  most  compre- 
hensive is  the  catalogue  of  the  Hopkins  railway  library  of  Stan- 
ford University.  Others  are  the  catalogues  of  the  library  of 
the  American  Society  of  Civil  Engineers,  and  of  the  library  of 
the  New  York  Railroad  Branch  Young  Men's  Christian  Associa- 
tion. The  Library  of  Congress  has  issued  lists  of  refei-ences  on 
"Railroads  in  their  Relation  to  the  Government  and  the  Public" 
and  on  the  "Valuation  and  Capitalization  of  Railroads."  Since 
its  first  issue,  the  Archiv  Fiir  EisenbaJimvesen  has  contained  bi- 
monthly lists  of  notable  books  and  articles,  and  beginning  with 
the  second  volume  (1888)  the  Btilletin  of  the  International 
Railway  Congress  has  contained  a  monthly  bibliography,  com- 
piled from  periodicals  and  announcements  of  publishers  In 
all  countries.  The  Economic  Bulletin,  established  in  1908,  was 
given  over  to  book  reviews  and  current  lists  of  publications. 
In  1911  it  was  merged  in  the  American  Economic  Review.  Be- 
ginning also  in  1908  the  Journal  of  Political  Economy  contained 
similar  lists  of  recent  publications  until  1911  when  the  service 
was  taken  over  by  the  Bibliography  of  Social  Science,  then 
24  353 


RAILROAD  FINANCE 

in  its  seventh  volume.  Of  special  lists.  Rowker  and  Tie's  "Read- 
er's Guide  in  Economic,  Social  and  Political  Science"  and 
Larned's  "Literature  of  American  History"  contain  titles  on 
railroad  finance.  Lee's  "Bibliography  of  the  Baltimore  and 
Ohio,"  the  only  publication  of  its  liind,  is  many  years  out  of 
date.  Hartman's  "Praktisches  Handbuch  iiber  die  Anlage  von 
Eisenbahnen"  (1837)  contains  a  chapter  on  contemporary  rail- 
road literature,  with  references  to  English  and  American  works. 
Most  monographs  on  subjects  in  economic  history  and  corpora- 
tion finance,  presented  for  the  doctorate  in  American  universities, 
contain  more  or  less  elaborate  lists  of  source  material,  and  an 
increasing  number  of  such  theses  are  being  prepared  upon  rail- 
road subjects.  Chapter  bibliographies  are  given  in  Hadley's 
"Railroad  Transportation,"  McVey's  "Railroad  Transportation," 
Johnson  and  Huebner's  "Railroad  Traffic  and  Rates,"  and  John- 
son's "American  Railway  Transportation" ;  and  a  bibliographical 
note  in  Daggett's  "Railroad  Reorganization"  gives  some  of  the 
most  important  references  in  the  general  field,  particularly  rail- 
road histories. 

Periodical  literature  is  readily  available  through  indexes. 
Poole's  ''Index  to  Periodical  Literature,"  with  its  yearly  sup- 
plement— the  Annual  Library  Index — covers  the  genei-al  field 
from  1802  to  1911.  The  Reader's  Guide  to  Periodical  Litera- 
ture, begun  in  1896,  is  issued  monthly,  with  an  annual  cumula- 
tion. Faxon's  "Magazine  Subject-Index"  is  an  annual  volume, 
first  issued  in  1907,  which  covers  periodicals  not  listed  in  Poole 
or  in  the  Reader's  Guide.  It  is  a  cumulation  of  the  quarterly 
lists  which  appear  in  the  Bulletin  of  Bihliography.  Jones'  "In- 
dex to  Legal  Periodical  Literature"  is  complete  to  1899.  In 
1908  the  "Index  to  Legal  Periodicals"  began  as  a  quarterly  pub- 
lication in  connection  with  the  Law  Library  Journal.  There  is  a 
cumulative  volume  at  the  end  of  each  year.  For  several  years, 
also,  the  Green  Bag  has  contained  select  lists  of  ai'ticles  in  the  law 
journals.  The  "Engineering  Index"  appears  monthly  in  the  Engi- 
neering Magazine.  Annual  volumes  have  been  published  covering 
the  period  since  1884. 

Periodicals. — The  files  of  railroad  journals  and  of  periodical? 
devoted  to  financial  and  investment  news  are  rich  in  materials 
upon  every  variety  of  subject  concerning  railroads,  but  there  is 
need  for  critical  handling.  The  American  Railroad  Journal  was 
established  at  the  beginning  of  the  railroad  era,  and  continued 
without   essential    change    until    188G.    Its   early    volumes    were 

354 


BIBLIOGRAPHY 

devoted  to  the  promotion  of  railroads  and  otlier  internal  im- 
provements, but  it  later  laid  more  stress  upon  financing  and 
management,  and  finally  changed  to  an  engineering  journal. 
From  the  files  of  this  single  periodical  can  be  obtained  a  sur 
prisingly  large  mass  of  data  upon  American  railroad  history. 
Second  place  must  be  given  to  Hunt's  Merchants'  Magazine,  es- 
tablished in  1839,  which  gave  much  space  to  railroad  news  and 
statistics  and  contributed  articles.  De  Bow's  Commercial  Re- 
view, published  with  interruptions  from  1846  to  1880,  was  the 
representative  magazine  of  the  commercial  and  industrial  in- 
terests of  the  South,  and  its  files  contain  much  railroad  ma- 
terial. The  second  railroad  journal  established  in  this  country 
was  the  Raihcay  Times,  which  was  begun  in  1849  and  continued 
for  upwards  of  twenty  years.  While  devoted  to  the  mechanical 
side  of  the  subject,  it  was  also  a  medium  for  news  and  general 
discussion.  Three  important  journals  were  founded  in  the  fif- 
ties ;  the  Railroad  Record,  the  industrial  and  financial  exponent 
for  the  Mississippi  valley;  the  United  States  Railroad  and  Min- 
ing Register,  the  forerunner  of  the  Railway  World  of  to-day; 
and  the  Railroad  Gazette.  The  Railway  Review  began  publica- 
tion in  18G8,  and  continued  for  thirty  years,  when  it  was  changed 
to  an  engineering  journal.  The  Raihcay  Age  was  established  in 
1876.  Other  railroad  periodicals  have  been  started  at  various 
limes,  to  run  for  a  few  years  and  suspend.  Their  files  are  rare, 
but  so  far  as  they  have  been  examined  they  are  not  of  great 
value.  All  contain  general  railroad  news  items,  statistics,  and 
reports,  with  market  quotations  and  general  discussion.  The 
Railroad  Gazette  iu  1908  absorbed  the  Raihcay  Age,  and  changed 
its  name  to  the  Railway  Age  Gazette.  It  is  concerned  primarily 
with  engineering,  operation,  and  finance.  Of  financial  journals, 
the  Commercial  and  Financial  Chronicle,  founded  in  18G5,  is 
invaluable.  It  gives  most  complete  and  accurate  abstracts  of 
railroad  reports,  together  with  extended  critical  discussion.  Its 
news  section  is  more  nearly  authoritative  than  that  of  any 
similar  publication,  and  its  system  of  indexing  makes  that  news 
easily  available.  From  its  files  an  outline  history  of  almost  any 
American  railroad  could  be  compiled.  Its  reports  of  reorganiza- 
tion committees  are  the  fullest  and  most  accessible.  In  its  rail- 
way and  industrial  supplement,  issued  quarterly,  are  given  finan- 
cial statistics  of  recent  date.  Beginning  in  1910,  it  has  issued  a 
monthly  railway  earnings  supplement.  Bradstrect's  contains  ed- 
itorial coiunient,  digests  of  railroad  reports,  and  such  news  as  ap- 

355 


RAILROAD  FINANCE 

peals  to  investors.  The  Wall  Street  Journal  is  not  only  a  financial 
newspaper ;  it  is  a  medium  of  editorial  expression  which  is  widely 
quoted,  because  it  is  both  authoritative  and  independent.  Rail- 
road matters  are  extensively  treated.  Three  foreign  journals 
devote  much  space  to  American  railroads.  In  Germany  there  is 
the  Archiv  Fiir  Eisenhahmresen,  whose  editor,  Dr.  Von  der  Leyen, 
has  an  intimate  knowledge  of  American  railroads.  In  England 
the  Economist  and  the  Statist  exert  great  influence  over  the 
British  holders  of  American  railroad  securities. 

Histories. — There  is  a  single  book  which  attempts  to  cover 
the  general  history  of  railroads  in  the  United  States.  Ring- 
wait's  "Development  of  Transportation  Systems"'  is,  therefore,  in- 
dispensable, but  its  usefulness  is  impaired  by  its  laik  of  specific 
references  to  sources  and  by  numerous  errors,  particularly  in 
Its  statistical  data.  About  half  of  Adams'  "Railroads ;  Their 
Origin  and  Problems,"  is  given  over  to  discussion  of  the  historical 
aspects  of  railroads  in  England  and  America.  Sterne's  article 
upon  the  "History  and  Political  Economy  of  Railroads,"  in  La- 
lor's  Cyclopfedia.  is  a  thorough  piece  of  work.  Kennedy's  series 
upon  the  "American  Railroad,"  in  the  Magazine  of  Western 
History,  contains  detailed  historical  material  upon  the  period 
prior  to  1850.  It  is  based  upon  a  wide  range  of  sources,  but 
lacks  specific  citations.  Short  outline  sketches  of  the  develop- 
ment of  American  railroads  abound  in  the  shape  of  magazine 
articles,  pamphlets,  and  chapters  in  books. 

There  are  many  collective  histories  which  deal  with  the  rail- 
roads of  the  country  at  large  or  of  those  of  a  single  section. 
Among  regional  histories  is  Warman's  popular  "Story  of  the 
Railroad,"  Poe's  "History  and  Construction  of  Transcontinental 
Railways,"  and  Adams'  "Canal  and  Railroad  Enterprise  of  Bos- 
ton" in  Winsor's  "Memorial  History  of  Boston."  Ackerman's 
"Early  Illinois  Railroads"  is  mainly  an  account  of  the  rise  of 
the  Illinois  Central.  More  comprehensive  in  scope  are  Flint's 
"Railroads  of  the  United  States,"  Poor's  "History  of  the  Rail- 
roads and  Canals  of  the  United  States,"  and  Stow's  "Capitalist's 
Guide  and  Railway  Annual,"  which  contain  summary  histories 
of  all  important  railroads.  Van  Oss's  "American  Railroads  as 
Investments"  gives  outline  histories  of  all  principal  systems,  as 
do  Snyder's  "American  Railways  as  Investments"  and  Meade's 
series  of  articles  in  the  Railway  World  on  the  "Great  American 
Railway  Systems."  Vernon's  "American  Railroad  Manual"  is 
made  up   largely   of   historical   and  statistical   accounts   of   rail- 

356 


BIBLIOGRAPHY 

roads.  The  files  of  Poor's  "Manual"  rontain  much  valuable  hls- 
torioal  material.  For  the  early  period,  Tanner's  "Description  of 
Canals  and  Railroads"  is  fragmentary  and  inaccurate,  as  are  all 
the  Tanner  books,  yet  there  is  no  other  contemporary  American 
\\'ork  of  similar  sort.  Fortunately,  Poussin's  "Chemins  de  Fer 
Americans,"  Chevalier's  "Histoire  et  Description  des  Voies  de 
Communication  aux  Etats-Unis,"  and  Gerstner's  "Inneru  Com- 
municationen  der  Vereinigten  Staaten"  admirably  supply  the  de- 
ficiency. These  are  the  reports  of  experts,  made  after  careful 
and  extended  examination  for  the  purpose  of  obtaining  informa- 
tion for  the  benefit  of  European  railroad  men.  They  are  filled 
with  valuable  detail  which  was  overloolced  by  American  writers. 
There  are  a  number  of  individual  railroad  histories,  but  they 
fire  of  widely  varying  value.  The  histories  of  most  of  the  older 
systems  have  been  thought  worth  recording,  and  the  records  of 
some  relatively  unimportant  railroads  have  also  been  written. 
Mott's  "Between  the  Ocean  and  the  Lakes"  is  a  full  and  accurate 
history  of  the  Erie,  which  holds  first  rank  among  works  of  its 
kind.  Lord's  "Historical  Review  of  the  Erie  Railroad"  is  the 
work  of  a  former  president.  The  early  years  of  the  Baltimore 
and  Ohio  are  treated  in  Bowen's  "Rambles  in  the  Path  of  the 
Steam  Horse,"  and  in  two  books  by  W.  P.  Smith — "History  and 
Description  of  the  B.  &  O.  Railroad,"  and  "The  Book  of  the 
Great  Railway  Celebrations  of  1857."  Reizenstein's  "Economic 
History  of  the  Baltimore  and  Ohio  Railroad''  also  has  to  do 
with  the  period  of  beginnings.  Wilson's  "History  of  the  Penn- 
sylvania Railroad"  is  confined  to  the  lines  east  of  Pittsburgh. 
It  is  based  partly  upon  documents  furnished  by  the  company, 
but  gives  too  little  attention  to  historical  matters  other  than 
biography.  Bliss's  "Historical  Memoir  of  the  Western  Railroad" 
is  not  a  book  of  reminiscences,  but  a  full,  authoritative  history, 
which  ranks  high  among  books  of  its  kind.  Ackerman's  "His- 
torical Sketch  of  the  Illinois  Central  Railroad"  is  a  rambling 
biographical  record,  with  far  less  material  upon  the  Illinois  Cen- 
tral than  is  to  be  found  in  his  "Early  Illinois  Railroads."  The 
pamphlet  is  rare,  but  of  little  value.  Gary's  "Lake  Shore  and 
Michigan  Southern  Railway"  is  largely  devoted  to  biographical 
sketches,  as  is  "The  Reading  Railroad :  the  History  of  a  Great 
Trunk  Line."  Two  of  the  "gi-anger"  roads  have  put  out  official 
histories.  The  files  of  the  reports  of  the  Chicago  and  North 
Western  have  been  condensed  into  Steimett's  "Yesterday  and 
To-day."    It  is  a  bare  outline  record,  but  it  has  the  advantage 

357 


RAILROAD  FINANCE 

of  being  authoritative.  The  "Organization  and  History  of  the 
Chicago,  Milwauliee,  and  St.  Paul  Railway"  was  written  by 
John  Watson  Gary,  the  last  survivor  of  the  group  of  men  who 
built  up  that  system.  The  book  is  a  legal  chronicle  rather  than 
a  history,  but  it  contains  information  which  makes  it  of  great 
value.  It  was  written  for  the  guidance  of  officials  of  the  road, 
and  never  generally  issued.  One  of  the  best  railroad  histories 
is  Smalley's  "History  of  the  Northern  Pacific."  It  is  more  than 
a  railroad  history ;  it  is  a  history  of  the  upbuilding  of  the 
whole  Northwest.  Wheeler's  "Story  of  a  Railway"  is  a  mere 
sketch  of  the  history  of  the  same  railroad,  but  it  is  well  written 
and  official.  The  affairs  of  the  Union  Pacific  have  received  at- 
tention in  two  scholarly  monographs — Davis'  "Union  Pacific 
Railway,"  and  White's  "History  of  the  Union  Pacific  Railway." 
Though  dealing  with  a  single  phase  of  the  subject.  Crawford's 
"Credit  JNIobilier  of  America"  contains  collateral  historical  ma- 
terial upon  this  road.  No  single  account  has  been  written  of 
the  history  of  the  Central  Pacific,  but  in  the  Bancroft  "History 
of  Califoi-nia,"  VII,  and  "Chronicles  of  the  Builders,"  V  and 
VI,  there  is  much  material,  presented  in  a  spirit  favorable  to 
the  company.  The  other  side  is  given  in  Robinson's  "Octopus," 
which  is  a  violently  denunciatory  record  with  details  impossible 
either  to  accept  or  to  disprove.  Of  like  order,  but  probably 
more  trustworthy  is  Graham's  "Central  Pacific  Railroad,"  which 
presents  detailed  copies  from  official  records  to  support  charges 
against  the  company.  A  documentary  i50urce  of  value  is  the 
Report  of  the  Pacific  Railway  Commission  of  1887.  The  "His- 
tory of  the  Old  Colony  Railroad"  is  a  compilation  of  material 
from  the  annual  reports  of  the  company.  A  railroad  history 
which  deals  more  particularly  with  mattera  of  municipal  interest 
is  Hollander's  "Cincinnati  Southern  Railway."  Hinsdale's  "His- 
tory of  the  Long  Island  Railroad"  is  a  mere  outline  sketch. 
Individual  railroad  history  is  also  the  subject  of  many  articles 
in  magazines  and  papers  in  the  transactions  of  engineering  and 
historical  societies.  Many  studies  have  been  made  of  a  single 
period  in  the  hi.story  of  a  railroad.  Such  are  Adams'  "Chapter 
of  Erie,"  Hill's  "Beginnings  of  the  Boston  and  Worcester  Rail- 
road," Latrobe's  "Baltimore  and  Ohio  Railroad,"  and  Munsell's 
"Origin,  Progress,  and  Vicissitudes  of  the  Mohawk  and  Hudson 
Railroad." 

Reports  of  Foreign  Observers. — The  observations  of  travelers, 
and  reports  of  examinations  of  American  railroads  by   foreign 

358 


BIBLIOGRAPHY 

experts  are  of  decided  value,  historically  and  othervv'ise.  The 
works  of  Poussin,  Chevalier,  and  Gerstner,  already  men- 
tioned, belong  to  this  class.  Gerstner  was  a  Belgian  who  ranked 
auioug  the  leading  B]uropean  engineers  of  his  time,  and  his  re- 
ports of  American  railroad  conditions  are  of  greatest  value. 
Chevalier's  tour  of  America  was  made  for  the  French  govern- 
ment, as  was  that  of  Lavoinne  and  Pontzen,  whose  "Chemins 
de  Fer  en  Amerique"  is  a  remarkably  accurate  and  comprehen- 
sive report.  Dubois'  "Chemins  de  Fer  aux  lEtats-Unis"  is  a  good 
general  study  of  more  recent  date.  Galton's  "Railways  of  the 
United  States,"  Priestly's  "Report  on  the  Organization  and  Work- 
ing of  Railways  in  America,"  and  Collier's  "Report  on  United 
States  Railways" — all  British  government  publications — have  de- 
cided value  for  American  readers.  Other  general  studies  by 
foreign  critics  are:  Von  der  Leyen's  "Nordamerikanische  Eisen- 
bahnen,"  Kupka's  "Amerikanische  Eisenbahneu,"  Hoff  and 
Schwabach's  "Nordamerikanische  Eisenbahnen,"  Lustig's  "Nord- 
amerikanische Eisenbahnwerte,"  Santilhano's  "Amerikaansche 
Spoorwegen,"  and  Swann's  "Investor's  Notes  on  American  Rail- 
roads." 

II 

Promotion. — A  full  bibliography  of  railroad  promotion  appears 
in  Cleveland  and  Powell's  "Railroad  Promotion  and  Capitaliza- 
tion in  the  United  States,"  which  is  a  forerunner  of  the  present 
work.  Its  contents  need  not  be  reproduced  here;  but  to  the 
references  there  given  should  be  added  Machen's  "Treatise  on 
the  Modern  Law  of  Corporations,"  which  contains  a  chapter  upon 
promotion  and  also  a  discussion  of  underwriting  syndicates  that 
is  a  most  important  contribution  to  the  meager  literature  of  the 
subject.  Lough's  "Corporation  Finance"  and  Meade's  "Corpora- 
tion Finance"  also  contain  chapters  on  these  subjects. 

Construction. — Much  of  what  has  been  written  upon  railroad 
construction  belongs  to  the  literature  of  exposure,  and  not  a  little 
of  it  deals  with  the  Credit  Mobilier.  Hassler's  "Railroad  Rings 
and  Their  Relation  to  the  Railroad  Question"  is  a  general  ar- 
raignment of  construction  company  methods.  Hadley's  "Rail- 
road in  its  Business  Relations,"  and  Davis'  "Union  Pacific  Rail- 
way" also  contain  discussions  of  the  general  phases  of  the  sub- 
ject. The  main  facts  concerning  the  Credit  Mobilier  are  to  be 
found  In  the  reports  of  the  Wilson  and  Poland  committees,  and 
in  the  Congressional  Record.     Senator  Hoar,  who  was  a  member 

359 


RAILROAD  FINANCE 

of  the  Wilson  committee,  gave  his  final  judgment  in  his  "Auto- 
biograpby  of  Seventy  Years."  The  subject  is  also  ably  treated 
in  Davis'  "Union  Pacific  Railway,"  White's  "History  of  the  Union 
Pacific  Railway,"  and  Rhodes'  "History  of  the  United  States," 
VII.  Crawford's  "Credit  Mobilier"  is  an  extended  review  of  the 
official  reports,  with  conclusions  favorable  to  Oakes  Ames.  Row- 
land Hazard,  a  member  of  the  executive  committee  of  the  seven 
trustees,  presented  a  defense  in  his  pamphlet  on  "The  Credit  Mo- 
bilier of  America."  Several  books  have  been  prepared  to  vindi- 
cate those  who  were  put  in  bad  light  by  the  congressional  in- 
vestigation. The  most  noteworthy  of  these  is  "Oakes  Ames ;  A 
Memoir,"  which  was  published  by  the  Ames  family.  Hollister's 
"Life  of  Schuyler  Colfax"  contains  a  review  of  the  evidence,  and 
a  defense  drawn  up  after  the  manner  of  the  jury  lawyer.  Gar- 
field's "Review  of  the  Transactions  of  the  Credit  Mobilier"  is 
a  political  tract.  The  history  of  the  building  of  the  Central 
Pacific  is  given  in  the  Report  of  the  Pacific  Railway  Commission 
of  1887,  with  the  accompanying  testimony,  and  also  in  the 
voluminous  Report  made  in  1897  by  the  Senate  Committee  on 
Pacific  Railroads  upon  the  question  of  refunding  the  government 
loan.  Additional  material  is  to  be  found  in  Graham's  "Central 
Pacific  Railroad  Company."  The  defense  of  the  company  ap- 
pears in  Lansing's  "Relations  Between  the  Central  Pacific  Rail- 
road Company  and  the  United  States,"  and  in  Haymond's  "Cen- 
tral Pacific  Railroad  Company ;  its  Relations  to  the  Government." 

Equipment. — The  financing  of  railroad  equipment  is  a  subject 
which  financial  writers  have  left  in  comparative  neglect.  A 
series  of  four  editorial  articles  on  "Car  Trusts,"  in  the  Commercial 
and  Financial  Chronicle,  LXXXI,  and  LXXXII,  traces  the  growth 
of  the  practice  of  procuring  equipment  through  contracts  of  con- 
ditional sale,  defines  the  methods  employed,  and  considers  those 
provisions  of  car  trust  agreements  which  affect  the  security  of 
the  certificates.  The  legal  phases  of  the  subject  are  treated  in 
Rawle's  "Car  Trust  Securities."  Davis  and  Browne's  "Car  Trusts 
in  the  United  States,"  Heinsheimer's  "Species  of  Contract  Known 
as  Car  Trust,"  and  also  in  chapters  in  Baldwin's  "American 
Railroad  Law"  and  Short's  "Law  of  Railway  Bonds  and  Mort- 
gages." 

Additions  and  Betterments. — The  physical  condition  of  rail- 
road property  is  a  matter  of  first  importance  to  the  holder  of 
securities,  and  maintenance  and  betterments  therefore  receive 
much    attention    from    writers    upon     invcsliuents.     Discussions 

360 


BIBLIOGRAPHY 

from  this  viewpoint  appear  in  Moody's  "Analysis  of  Railroad 
Investments,"  Snyder's  "American  Railways  as  Investments," 
Mundy's  "Earning  Power  of  Railroads,"  Woodlock's  "Anatomy 
of  a  Railroad  Report,"  and  "The  Physical  Aspect  in  Railroad 
Accounting,"  and  in  Eaton's  "Railroad  Operations."  Hardt's  ar- 
ticle on  "Railway  Maintenance  of  Way"  has  to  do  chiefly  with 
physical  detail.  How's  article  on  "Maintenance  of  Way  and 
Structures"  emphasizes  the  distinction  between  surcharged  main- 
tenance accounts  and  surplus.  Cunningham's  "Economics  of 
Railroad  Maintenance  of  Way,"  a  short  article,  is  a  plea  for 
more  generous  expenditures  for  betterments.  The  technical  side 
of  the  subject  is  briefly  treated  in  Byers'  "Economics  of  Railway 
Operation."  Berg's  paper  on  "The  Distinction  Between  Repairs 
and  Improvements"  submits  a  proposed  classification  of  main- 
tenance of  way  expenses  which  is  intended  to  facilitate  the  exact 
separation  of  maintenance  and  betterments  in  railroad  accounts. 

Management. — Almost  any  topic  in  railroad  finance  might  be 
properly  considered  under  the  head  of  administration  or  man- 
agement. Here  it  will  be  i-estricted  to  include  financial  organiza- 
tion and  financial  mechanism.  Byers'  "Economics  of  Railway 
Operation"  is  an  authority  upon  railroad  organization.  A  more 
recent  book  is  Morris'  "Railroad  Administration."  An  excellent 
work,  by  a  British  expert,  is  Priestley's  "Report  on  the  Organiza- 
tion and  Working  of  Railways  in  America."  The  legal  text 
books  are  the  best  references  for  particulars  as  to  the  nature 
of  securities  and  the  manner  of  their  issue.  Such  are  Helli- 
well's  "Treatise  on  Stock  and  Stockholders,"  Cook's  "Treatise 
on  the  Law  of  Corporations,"  Machen's  "Treatise  on  the  Modern 
Law  of  Corporations,"  Reid's  "Treatise  on  the  Law  Pertaining 
to  Corporate  Finance,"  Beach's  "Commentaries  on  the  Law  of 
Private  Corporations,"  Elliott's  "Treatise  on  the  Law  of  Rail- 
roads," Jones'  "Treatise  on  the  Law  of  Corporate  Bonds  and 
Mortgages,"  and  Short's  "Law  of  Railway  Bonds  and  Mortgages." 
Two  recent  works  are  Lough's  "Corpoi-ation  Finance"  and  Meade's 
"Corporation  Finance."  Other  references  worthy  of  mention  are 
Rollins'  "Money  and  Investments,"  Smith's  "Financial  Diction- 
ary," Nelson's  "Bond  Buyer's  Dictionary,"  and  Chamberlain's 
"Principles  of  Bond  Investment." 

Accounts. — Several  railroad  auditors  have  prepared  short 
papers  upon  the  subject  of  accounting.  Of  these  the  most  helpful 
is  Plant's  report,  "On  the  Question  of  Bookkeeping,"  submitted 
to  the  International  Railwjiy  Congress  in  1905.     It  is  a  syllabus 

361 


RAILROAD  FINANCE 

setting  forth  the  organization  and  methods  of  the  accounting 
department  of  a  representative  American  railroad.  A  later  paper 
by  the  same  writer  is  "Railway  Accounting  and  the  Preparation 
of  Young  Men  for  the  Accounting  Profession."  The  requirements 
of  the  Interstate  Commerce  Commission  under  the  Hepburn  act 
are  set  forth  in  County's  paper,  "On  the  Question  of  Statistics," 
which  was  submitted  to  the  International  Railway  Congress  in 
1910.  Another  general  paper  is  Burgess'  "Underlying  Principles 
and  General  Practices  of  Railway  Accounting  Departments." 
Whitehead's  "Railway  Auditor"  is  an  elaborate  syllabiis  of  a 
course  of  lectures.  Byers'  "Economics  of  Railway  Operation" 
contains  a  chapter  on  accounts,  as  do  McPherson's  "Working  of 
the  Railroads"  and  McVey's  "Railroad  Transportation."  Dew- 
snup's  compilation  on  "Railway  Organization  and  Working"  con- 
tains three  addresses  upon  special  branches  of  railroad  account- 
ing :  Nay's  "Duties  of  a  Comptroller  or  Chief  Accounting  Of- 
ficer," Dudley's  "Work  of  a  Freight  Auditor,"  and  Sloan's  "Audi- 
tor of  Expenditures."  In  Johnson  and  Huebner's  "Railroad 
Traffic  and  Rates,"  there  are  chapters  upon  the  accounting  of 
freight  and  of  passenger  revenue.  In  Eaton's  "Railroad  Opera- 
tions" there  is  much  detailed  but  fragmentary  discussion  of  the 
principles  of  railroad  accounting.  Two  recent  works  upon  the 
general  subject  of  accounting  are  concerned  with  railroad  ac- 
counts. Hatfield's  "Modern  Accounting"  ranks  as  the  best  Amer- 
ican book  in  its  field.  Cole's  "Accounts,"  also  a  valuable  work, 
bases  much  of  its  discussion  upon  illustrations  from  railroad 
practice.  Under  the  authority  of  the  Hepburn  act  the  Interstate 
Commerce  Commission  has  promulgated  six  classifications  of  op- 
erating accounts,  an  income  account,  and  a  balance  sheet.  These 
classifications  are :  "Operating  Expenses ;"  "Operating  Revenues  ;" 
"Expenditures  for  Road  and  Equipment ;"  "Locomotive-miles, 
Car-miles,  and  Train-miles ;"  "Additions  and  Betterments ;"  and 
"Outside  Operations."  All  are  issued  in  pamphlet  form  from 
the  oflice  of  the  commission.  Before  putting  these  ordei's  into 
effect  the  commission  issued  at  intervals,  beginning  in  Septem- 
ber, 1906,  a  series  of  circular  letters  containing  tentative  plans, 
with  explanatory  notes  setting  forth  the  principles  embodied  in 
the  general  scheme.  There  are  upwards  of  thirty  of  these  Ac- 
counting Series  Circulars,  and  they  are  helpful  as  aids  to  an 
understanding  of  the  purposes  of  the  commission.  On  several 
occasions  Doctor  Henry  C.  Adams,  until  recently  in  charge  of 
the  division  of  statistics   and  accounts,  has  contributed  to  the 

362 


BIBLIOGRAPHY 

discussion  of  this  subject — in  the  annual  reports  on  the  Statistics 
of  Railways,  in  a  published  address  upon  "Supervision  of  Rail- 
way Accounts."  and  in  an  official  letter  "On  Railroad  Bonds  as 
Securities  from  National  Banks." 

Statistics. — All  writers  upon  railroad  statistics  go  back  for 
first  principles  to  Fink's  "Cost  of  Railroad  Transportation." 
Woodlock's  "Ton  IMile  Cost"  is  thus  indebted  to  Fink,  but  its 
treatment  of  the  subject  is  along  independent  lines.  Talcott's 
"Transportation  By  Rail"  is  a  railroad  man's  book,  which  at- 
tempts to  show  the  character  and  cost  of  railroad  service.  The 
decision  of  the  Railroad  Commission  of  Wisconsin  in  the  case 
of  Buell  vs.  Chicago,  Milwaukee,  and  St.  Paul  (1907)  contains 
an  exhaustive  discussion  of  the  principles  of  allocation  of  trans- 
portation costs.  Robinson's  articles  on  the  "Legal,  Economic  and 
Accounting  Principles  Involved  in  the  Judicial  Determination 
of  Railway  Passenger  Rates,"  and  "Railway  Freight  Rates  and 
the  Legal,  Economic  and  Accounting  Principles  Involved  in  their 
Judicial  Determination,"  together  constitute  a  critical  study  of 
the  methods  of  distribution  of  earnings  and  expenses  as  brought 
out  in  the  above  case  and  in  similar  cases.  It  is  a  valuable 
contribution  to  the  scanty  literature  of  the  subject.  Eaton's 
"Railroad  Operations"  gives  much  space  to  the  discussion  of 
statistical  principles  and  methods,  but  it  is  without  semblance 
of  arrangement,  and  its  pages  are  crowded  with  unessential  de- 
tail. The  subject  of  statistics  is  also  considered  in  County's 
paper  "On  the  Question  of  Statistics,"  to  which  reference  has 
already  been  made,  and  in  chapters  in  Priestley's  "Report  on 
the  Organization  and  Working  of  Railways  in  America,"  and 
in  McPherson's  "Working  of  the  Railroads."  Peabody's  paper 
on  "Vitalized  Statistics"  is  an  exposition  of  the  most  advanced 
methods,  with  emphasis  upon  the  subject  of  traffic  statistics. 

Reports. — With  but  few  exceptions,  states  and  territories  re- 
quire annual  reports  from  railroads  for  the  purpose  either  of 
taxation  or  of  regulation.  These  reports  are  published  as  public 
documents,  and  their  value  necessarily  depends  upon  the  re- 
quirements ot  the  statutes  in  each  particular  case.  The  fullest 
returns  are  required  in  Connecticut,  Wisconsin,  Massachusetts, 
Maryland,  New  York,  and  Vermont.  The  returns  which  are 
made  to  the  Interstate  Commerce  Commission  are  published  in 
the  "Annual  Report  on  the  Statistics  of  Railways."  The  Inter- 
state Commerce  Commission  prepared  a  special  statistical  report 
on  "Railways  in  the  United  States  in  1902"  as  a  continuation  of 

363 


RAILROAD  FINANCE 

the  data  in  the  tenth  and  eleventh  census  reports.  All  railroads 
submit  annual  pamphlet  reports  to  their  shareholders.  These 
are  collected  and  published  in  abridged  form  in  Poor's  "Manual 
of  Railroads,"  Moody's  "Manual  of  Railroads  and  Corporation 
Securities,"  and  the  "Manual  of  Statistics."  Liberal  abstracts 
of  railroad  reports  appear  as  a  regular  feature  of  the  Com- 
mercial and  Financial  Chronicle.  The  revenue  accounts  of  the 
principal  systems  are  compiled  each  year  and  published  in  Mundy's 
"Earning  Power  of  Railroads."  Copeland's  "Comparative  Analy- 
ses of  Railroad  Reports,"  is  prepared  in  great  detail,  and  pub- 
lished at  a  cost  that  puts  it  beyond  the  reach  of  the  ordinary 
student  or  investor. 

Expositions  of  the  methods  of  analyzing  railroad  reports  are 
few  but  adequate.  Moody's  "Analysis  of  Railroad  Investments," 
published  annually  beginning  in  1909,  sets  forth  the  methods 
of  determining  the  value  of  railroad  securities.  It  is  easily  the 
most  helpful  guide  to  the  investor  and  to  the  student  of  railroad 
finance.  Woodlock's  "Anatomy  of  a  Railroad  Report"  is  a  stand- 
ard work  of  somewhat  limited  scope.  A  chapter  on  "Examina- 
tion of  Railway  Reports"  in  Greene's  "Corporation  Finance"  con- 
tains a  detailed  analysis  of  the  report  of  a  suppositious  railroad 
in  which  the  underlying  principles  are  clearly  brought  out.  A 
similar  chapter  is  to  be  found  in  Byers'  "Economics  of  Railway 
Operation."  The  introduction  to  Snyder's  "American  Railways 
as  Investments"  contains  an  extended  discussion  of  the  "Methods 
of  Estimating  Railway  Values."  Woodlock's  article  on  "The 
Physical  Aspect  in  Railroad  Accounting"  is  a  plea  for  more  ade- 
quate physical  data  in  annual  reports.  For  critical  reviews  of 
the  reports  of  railroads,  the  Wall  Street  Journal  is  the  first 
authority,  and  this  applies  not  only  to  the  annual  reports  but 
also  to  the  statements  submitted  throughout  the  year.  The 
Railway  Age  Oazette  also  pays  liberal  attention  to  such  re- 
views. 

Receivership. — Railroad  receivership  is  a  subject  of  direct  finan- 
cial interest,  but  one  which  has  been  treated  most  in  its  legal 
aspects.  Yet  little  of  what  has  been  written  of  the  principles 
and  methods  of  receivership  is  too  technical  for  the  student 
of  finance.  The  nature  of  railroad  bonds  and  mortgages  is  con- 
sidered in  Jones'  "Treatise  on  the  Law  of  Corporate  Bonds  and 
Mortgages,"  Short's  "Law  of  Railway  Bonds  and  Mortgages," 
Reid's  "Treatise  on  the  Law  Pertaining  to  Corporate  Finance," 
Cook's  "Treatise  on  the  Law  of  Corporations,"  and  Thompson's 

364 


BIBLIOGRAPHY 

"Commentaries  on  the  Law  of  Private  Coi-porations."  The  text- 
books on  receivership  necessarily  devote  much  space  specifically 
to  railroads.  Of  these  Alderson's  "Practical  Treatise  on  the 
Law  of  Receivers"  and  High's  "Treatise  on  the  Law  of  Receiv- 
ers" are  the  most  commonly  used.  Others  are  Beach's  "Com- 
mentaries on  the  Law  of  Receivers,"  which  was  the  forerunner 
of  Alderson,  Smith's  "Law  of  Receivership,"  and  Gluck  and 
Becker's  "Law  of  Receivers  of  Corporations."  Useful  articles 
are  also  to  be  found  in  both  editions  of  the  "American  and 
English  Encyclopjedia  of  Law."  In  the  textbooks  on  railroad 
law  there  are  chapters  upon  the  subject  of  receivership.  The 
subject  is  extensively  treated  in  Elliott's  "Treatise  on  the  Law 
of  Railroads,"  Beach's  "Modern  Law  of  Railways,"  and  Wood's 
"Treatise  on  the  Law  of  Railroads." 

Various  disputed  questions  in  the  theory  and  practice  of  rail- 
road receivership  have  been  discussed  in  articles  in  legal  journals 
and  in  published  addresses.  Storey's  presidential  address  before 
the  American  Bar  Association  in  1896  was  largely  given  over  to 
a  condemnation  of  "friendly"  receivership  as  an  invasion  of  the 
rights  of  secured  creditors.  Chamberlain's  "New-fashioned  Re- 
ceivership" also  follows  this  line  of  argument,  though  with  less 
aggressiveness.  Bispham's  address  on  the  "Rights  of  Material 
Men  and  Employes  of  Railroads  as  against  Mortgagees'"  gives 
expression  to  alarm  over  the  growth  of  the  practice  of  allowing 
"back  claims"  in  advance  of  the  liens  of  bondholders.  Metcalfe's 
article  on  the  "Priority  over  Mortgage  of  Debts  Contracted  by 
Railroads  before  Receivership"  is  a  much  more  satisfactory  ex- 
position of  the  same  subject.  Godkin's  "Courts  as  Railway  Man- 
agers" deplores  the  growth  of  railroad  receivership  and  the  loss 
to  bondholders  through  the  issue  of  certificates.  Carr's  mono- 
graph on  "Receivers'  Certificates"  is  the  most  extensive  treatise 
upon  this  subject,  which  Is  also  considered  in  the  various  treatises 
on  receivership  and  railroad  law. 

The  best  general  treatment  of  railroad  receivership  in  its 
financial  aspects  appears  in  Greene's  "Commercial  Basis  for 
Railway  Receivership,"  which  is  also  incorporated  in  the  chapter 
on  "Reorganizations  and  Receiverships"  in  his  "Corporation  Fi- 
nance." McPherson's  "Working  of  the  Railroads"  contains  an 
outline  discussion  of  the  subject  in  the  chapter  on  "Financial 
Administration,"  as  does  Sterne's  article  on  "Railway  Reorganiza- 
tion." The  development  of  receivership  is  traced  in  Crowell's 
"Railway    Receivership    in   the    United    States."     Swain's    mono- 

365 


RAILROAD  FINANCE 

graph  on  the  "Economic  Aspects  of  Railroad  Receivership"  con- 
tains a  historical  and  statistical  chapter  and  a  good  discussion 
of  the  administrative  activities  of  receivers,  together  with  a 
critical  bibliography.  The  statistics  of  receiverships  for  the  early 
period  are  not  available  in  collected  form.  Probably  the  best 
source  for  this  material  is  the  Commercial  and  Financial  Chron- 
icle, though  satisfactory  results  may  be  obtained  from  the  use 
of  files  of  railroad  periodicals.  The  Ralhcay  Age  for  many 
years  compiled  an  annual  statement  of  railroads  in  receivership, 
and  tlie  RaUitay  Age  Gazette  now  follows  this  practice.  The 
annual  report  of  the  Interstate  Commerce  Commission  on  the 
"Statistics  of  Railways"  contains  a  brief  statement  of  receiver- 
ships. For  the  period  from  1884  to  1900  nothing  is  more  useful 
than  Meany's  "Record  of  Receiverships  and  Foreclosure  Sales," 
which  appears  as  a  part  of  "A  Study  in  Railway  Statistics"  in 
the  introduction  to  Poor's  "Manual"  for  1900. 

Reorganization. — Daggett's  "Railroad  Reorganization"  is  one  of 
the  most  comprehensive  monographs  in  the  entire  field  of  railroad 
finance.  It  treats  in  detail  of  the  reorganization  of  eight  rep- 
resentative railroads,  and  in  a  summary  chapter  contains  a  crit- 
ical discussion  of  the  subject.  Meade's  "Reorganization  of  Rail- 
roads" is  much  briefer,  but  it  is  complete  and  decidedly  useful. 
The  subject  is  also  considered  in  Meade's  "Corporation  Finance" 
and  in  Lough's  "Corporation  Finance."  Other  important  studies 
appear  in  Green's  chapter  on  "Reorganizations  and  Receiverships ' 
in  his  "Corporation  Finance,"  and  in  Beach's  short  article  on 
"Railway  Reorganization."'  Joliue's  address  on  "Railroad  Re- 
organization," while  largely  given  over  to  a  discussion  of  the 
law  of  receivership,  is  decidedly  worth  while.  Sterne's  "Railway 
Reorganization"  is  fragmentary  but  suggestive.  The  legal  side 
of  the  subject  is  treated  in  a  number  of  textbooks,  among  which 
are  Jones'  "Treatise  on  the  Law  of  Corporate  Bonds  and  Mort- 
gages," Reid's  "Treatise  on  the  Law  Pertaining  to  Corporate 
Finance,"  Short's  "Law  of  Railway  Bonds  and  Mortgages," 
Beach's  "Commentaries  on  the  Law  of  Piuvate  Corporations," 
and  Beach's  "Modern  Law  of  Railways,"  Clark  and  Marshall's 
"Treatise  on  the  Law  of  Private  Corporations,"  Machen's  "Treat- 
ise on  the  Modern  Law  of  Corporations,"  Elliott's  "Treatise  on 
the  Law  of  Railroads,"  and  Myer's  "Winding  up  and  Reorganiza- 
tion of  Corporations,"  in  the  second  edition  of  the  "American 
and  English  Encyclopaedia  of  Law." 

Reorganization  agreements  together  with  critical  and  editorial 
comment  may  be  found  in  the  Commercial  and  Financial  Chron- 

366 


BIBLIOGRAPHY 

icle.  An  analysis  of  the  plans  of  reorganization  of  fifty-seven 
railroads  appears  in  Meany's  "Study  in  Railway  Statistics"  in 
Poor's  "Manual"  for  1900. 

Consolidation. — Much  of  what  has  been  written  on  railroad 
consolidation  is  chiefly  concerned  with  its  relation  to  rates,  and 
the  financial  aspects  of  the  subject  have  been  comparatively 
neglected.  In  the  Final  Report  of  the  United  States  Industrial 
Commission.  Doctor  William  Z.  Ripley  has  given  the  most  ade- 
quate treatment  of  consolidation  from  the  standpoint  of  finance, 
outlining  its  history,  the  methods  by  which  it  has  been  effected, 
and  the  results  upon  the  public  and  the  investor.  He  has  con- 
tinued the  discussion  in  a  recent  article  on  "Railway  Speculation." 
A  less  elaborate  but  valuable  article  is  Newcomb's  "Concentra- 
tion of  Railway  Control."  Keys'  "Overlords  of  Railroad  Traf- 
fic." and  his  "Shifting  of  Railroad  Control,"  Newcomb's  "Recent 
Great  Railway  Combinations,"  and  Cunniff's  "Increasing  Railroad 
Consolidation"  are  short  articles  showing  the  extent  to  which 
consolidation  has  been  carried  out.  One  of  the  most  important 
reports  which  has  been  prepared  by  the  Interstate  Commerce  Com- 
mission has  to  do  with  the  Intercorporate  Relationship  of  Rail- 
ways. This  report  furnishes  complete  information  as  to  the 
extent  to  which  the  railroads  of  the  United  States  are  bound 
together  through  the  ownership  of  shares.  It  is  also  the  only 
adequate  source  for  material  pertaining  to  holding  companies. 
Meyer's  "History  of  the  Northern  Securities  Case"  is  a  full,  de- 
tailed study  of  the  events  leading  up  to  the  final  decision,  and 
of  the  principles  involved  in  that  decision.  The  subject  has 
been  treated  in  a  great  many  articles,  among  which  may  be 
mentioned.  Garner's  "Northern  Securities  Case,"  Cutting's  "North- 
ern Securities  Company,"  and  Randolph's  "Considerations  on  the 
State  Corporation  in  Federal  and  Interstate  Relations;  the 
Northern  Securities  Cases."  A  bibliography  of  this  case,  com- 
prising over  a  hundred  titles,  appears  in  the  Library  of  Congress 
"List  of  Books  Relating  to  Railroads  in  their  Relation  to  the 
Government  and  the  Public."  The  law  of  consolidation  is  fully 
treated  in  Noyes'  "Treatise  on  the  Law  of  Intercorporate  Rela- 
tions" and  in  Clark's  "Consolidation  of  Corporations."  Legal 
textbooks  bearing  upon  this  subject  are:  Cook's  "Treatise  on 
the  Law  of  Corporations,"  Morawetz's  "Treatise  on  the  Law  of 
Private  Corporations,"  Hirschl's  "Combination,  Consolidation  and 
Succession  of  Corporations,"  Helliwell's  "Treatise  on  Stock  and 
Stockholders,"  Elliott's  "Treatise  on  the  Law  of  Railroads,"  and 
Beach's  "Modern  Law  of  Railways." 

367 


RAILROAD  FINANCE 

Overcapitalization. — Scattered  throughout  the  literature  of  rail- 
roads is  an  abundance  of  material  upon  stock-watering,  but  the 
greater  part  of  the  discussion  Is  so  obviously  biased  and  so  lack- 
ing in  the  observance  of  the  principles  of  fair  exposition  that  it 
contributes  nothing  to  the  solution  of  this  most  involved  question 
of  railroad  finance.  The  report  of  the  Railroad  Securities  Cora- 
mission,  transmitted  to  congress  in  December,  1911,  is  easily  the 
leading  authority.  In  a  class  by  themselves  among  individual 
contributions  to  the  discussion  are  Ripley's  "Capitalization  of 
Public  Service  Corporations,"  which  is  an  enlarged  version  of 
the  author's  discussion  of  the  subject  in  the  Final  Report  of 
the  United  States  Industrial  Commission,  Green's  "Railroad 
Stock-watering."  which  also  appears  in  somewhat  different  form 
as  a  chapter  on  "Public  Policy  Toward  Corporation  Profits"  in 
his  "Corporation  Finance,"  and  Bullock's  paper  on  "Control  of 
the  Capitalization  of  Public  Service  Corporations  in  Massachu- 
setts." Doctor  Ripley  considers  the  different  principles  of  cap- 
italization, the  methods  of  stock-watering,  and  the  effects  of 
inflation  upon  the  shipper  and  the  investor.  Further  discussion 
of  the  subject  appears  in  his  article  on  "Stock-watering."  Spen- 
cer's "Prevention  of  Stock-watering  by  Public  Corporations"  is 
a  brief  article  along  similar  lines,  Greene's  "Railroad  Stock- 
watering"  is  a  temperate  discussion  from  the  investor's  stand- 
point, in  which  is  made  a  distinction  between  justifiable  and 
unjustifiable  methods  of  inflation,  and  a  plea  for  a  fairer  public 
attitude  towai'd  reasonable  returns  on  railroad  investments. 
Doctor  Bullock's  article  is  a  critical  discussion  of  the  ultra-con- 
servative attitude  of  Massachusetts  toward  capitalization.  Many 
attempts  have  been  made  to  determine  the  extent  of  overcap- 
italization of  American  railroads.  Marx's  "Finances  of  Engi- 
neering" presents  estimates  to  show  that  they  are  enormously 
inflated,  and  Meade's  "Cost  of  American  Railroads"  tends  to 
the  opposite  conclusion. 

A  long  list  might  be  presented  of  books  and  articles  containing 
references  to  this  subject  of  watered  stock.  Railroad  men  are 
unable  to  consider  it  in  its  broader  aspects,  as  is  evident  from 
the  writings  of  Stickney,  Fish,  Kirkman,  and  others.  Morgan's 
"Public  and  the  Railways"  is  an  example  of  the  extremes  to 
which  an  over-zealous  railroad  sponsor  may  go,  and  Thompson's 
"Cost,  Capitalization,  and  Estimated  Value  of  American  Rail- 
roads" is  a  subsidized  compilation  which  makes  no  pretensions 
to  lack  of  bias.     On  the  other  side,  and  also  lacking  in  breadth 

368 


BIBLIOGRAPHY 

of  view,  may  be  cited  Hudson's  "Railways  and  the  People," 
Larrabee's  "Railroad  Question,"  and  Van  Oss'  "American  Rail- 
roads as  Investments."  Watered  stock  from  the  legal  stand- 
point is  considered  in  detail  in  Helliwell's  "Treatise  on  Stock 
and  Stockholders"  and  in  Cook's  "Treatise  on  the  Law  of  Cor- 
porations." 

Ill 

Abbott,  Lyman.  The  American  Railroad,  Harper's  Magazine. 
N.  Y.,  1874:  xlix,  375-94. 

AcKEBMAN,  William  K.  Early  Illinois  Railroads.  Chicago,  1884. 
174  pp. 

Historical   Sketch  of  the  Illinois  Central  Railroad,  together 

with  a  brief  biographical  record  of  its  incorporators  and 
some  of  its  early  officers.     Chicago,  1890.     153  pp. 

Notes    on    Railway    Management,    North    American    Review. 

N.   Y.,   1884;   cxxxix,  531-46. 

AcwoRTH,  William  Mitchell.  Railroad  Accounting  in  America 
vs.  England,  North  American  Review.  N.  Y.,  1910:  cxci, 
330-9. 

Adams,  Charles  Francis,  Jr.  The  Canal  and  Railroad  Enter- 
prise of  Boston.  Winsor,  The  Memorial  History  of  Bos- 
ton.    Boston,  1881:  iv,  111-50. 

A  Chapter  of  Erie.     Boston,   1869.     152  pp.     Enlarged   from 

North  American  Review.     Boston,  1869 ;   cix,  30-106. 

An  Erie  Raid,  North  American  Review.     Boston,  1871 :  cxii, 

241-91. 

The  Government  and  the  Railroad  Corporations,  North  Amer- 
ican Review.     Boston,  1871 :  cxiii,  36-61. 

Railroad   Inflation,   North  American   Review.     Boston,   1869: 

cviii,  130-64. 

Railroad  Investments,  Anon.     Nation.     N.  Y.,  1872:  xv,  102-3. 

The  Railroad  System,  North  American  Review.     Boston,  1807 : 

civ,  476-511. 

■ Railroads :  Their  Origin  and  Problems.     N.  Y.,  1878.     216  pp. 

Also  published  under  the  title,  "Railroads  and  Railroad 
Questions." 

Railway  Problems  in  1869,  North  American  Review.     Boston, 

1870:  ex,  116-50. 

and    Henry    Adams.      Chapters   of   Erie   and   Other   Essays. 

Boston,  1871.     429  pp. 
25  369 


RAILROAD  FINANCE 

A  Chapter  of  Erie,  1-99;  An  Erie  Raid,  135-91; 
The  Railroad  System— The  Era  of  Change,  332-54;  The 
Transportation  Tax,  355-79;  Railroad  Consolidation, 
380-97;  Stock  Watering,  398-413;  The  Government  and 
the  Railroad  Corporations,  414-29. 

Adams,  Henry  Carter.  Administrative  Supervision  of  Railways 
under  the  Twentieth  Section  of  the  Act  to  Regulate  Com- 
merce, Quarterly  Journal  of  Economics.  Boston,  1908; 
xxii,  364-83. 

■ Government   Supervision   of   Railway    Accounts,   Government 

Accountant.     Washington,  1907:  i,  361-71. 

Railroad  Bonds  as  Securities  from  National  Banks.  Wash- 
ington, 1908.     7  pp.     U.  S.  Document ;  serial  5264. 

Same,   "Railway   Accounting   in   its   Application   to   Railway 

Bonds   as   Bank    Securities,"   Railway   World.     Philadel- 
phia, 1908:  lii,  115-7. 

Some   Recent   Results   in   Railway    Statistics   in  the   United 

States,    American    Statistical    Association,    Publications. 
Boston,   1893:   iii,  501-12. 

■ The  Statistical  Division  of  the  Interstate  Commerce  Commis- 
sion, Citizen.     Philadelphia,  1895:  i,  203-6. 

■ Valuation  of  Public  Service  Utilities,  American  Economic  As- 
sociation, Quarterly.    Princeton,  1910  (3  ser.)  :  xi,  184-95. 

The    Valuation    of   the   Non-physical    Element   in    Railways, 

Michigan     Political     Science     Association,     Publications. 
Ann  Arbor,  1901 :  iv,  293-6. 

Adams,  John,  Jr.  Stocks  and  their  Features — A  division  and 
classification,  American  Academy  of  Political  and  So- 
cial   Science,   Annals.     Philadelphia,   1910 :   xxxv,   525-44. 

Alderson,  William  A.  A  Practical  Treatise  on  the  Law  of  Re- 
ceivers as  Applicable  to  Individuals,  Partnerships,  and 
Corporations ;  with  extended  consideration  of  receivers 
of  railways.     N.  Y.,  1905.    956  pp. 

Alexander,  Edward  Porter.  Railroad  Consolidation.  McCain, 
Compendium  of  Transportation  Theories.  Washington, 
1903:  260-6. 

■ Railway   Management.     Cooley,   The  American   Railway.    N. 

Y.,     1889:     149-86.     From     Scribner's     Magazine.     N.    Y., 
1889:   V,  27-48. 

Alger,  Arthur  Martineau.  A  Treatise  on  the  Law  in  Relation 
to  Promoters  and  the  Promotion  of  Corporations.  Bos- 
ton, 1897.    302  pp. 

370 


BIBLIOGRAPHY 

Allen,  Philip  Loring,  Physical  Valuation  of  Railways,  Anon. 
Nation.     N.  Y.,  1908:  Ixxxvi.  209-10. 

American  Railroad  Journal.  N.  Y.,  1832-80.  Weekly.  (Semi- 
monthly, 1838-42;  monthly.  1844.)  Editors:  D.  Kimball 
JNIinor.  George  C.  Schaeffer,  Henry  Varnum  Poor,  John  H. 
Schultz,  George  F.  Swain,  Matthias  Nace  Forney. 
Various  changes  of  sub-title.  Published  in  Philadelphia, 
184()-9.  Continued  as  "Railroad  and  Engineering  Jour- 
nal" ;  since  1893  "The  American  Engineer  and  Railroad 
Journal." 

The  American  Railway  Review.     N.  Y.,  1859-Gl-j-?     Weekly. 

American  Society  of  Civil  Engineers.     Catalogue  of  the  Library. 
Compiled  by  Charles  Warren  Hunt.     N.  Y.,  1900.    703  pp. 
Railroads,  11-120. 

Same.     Supplement.     1902.     293  pp. 

Railroads,  11-120. 

Anderson,  Samuel.  Miscellaneous  Receipts  and  Accounts.  Phila- 
delphia, 1900.  9  pp.  P.  R.  R.  Y.  M.  C.  A.,  Railway 
Transportation ;  a  Course  of  Lectures. 

Andrews,  Edward  L.  The  Security  for  Railroad  Bonds,  Amer- 
ican Law  Review.     St.  Louis,  1880:  xx,  493-501. 

The  Watering  of  Railroad  Securities,  American  Law  Review. 

St.   Louis,   1887:  xxi,  090-704. 

Same,  Weekly  Law  Bulletin  and  Ohio  Law  Journal.  Co- 
lumbus and  Cincinnati,  1887:  xviii,  329-33. 

Angell,  Joseph  K.,  and  Samuel  Ames.  Treatise  on  the  Law  of 
Private  Cori)orations  Aggregate.  Revised  by  John 
Lathrop.     Boston    (11    ed.),    1882.     908  pp. 

Archiv  Fiir  Eisenbahnwesen.  Berlin,  1878—.  Bi-monthly.  Editor, 
Alfred  Friedricli  von  der  Leyen. 

Ardrey,  R.  L.  Absorbing  the  Water,  Railway  Age.  Chicago, 
1907:  xliv,  170-7. 

Railway   Capitalization ;    a   review   of   the   corporate   history 

of  ten  leading  western  railroads,  compiled  from  their 
ofRcial  annual  reports,  official  statements  and  circulars, 
and  other  authentic  sources  of  information.  Great 
Northern,  Northern  Pacific,  Union  Pacific,  Atchison, 
Topeka,  and  Santa  Fe,  Southern  Pacific,  Hlinois  Central, 
Roi'k  Island  System,  Chicago,  Burlington,  and  Quincy, 
Chicago  and  North  Western,  Chicago,  Milwaukee,  and 
St.   Paul.     Chicago,   1909.     48  pp. 

ASHCBOFT,  John   (compiler).     Ashcroft's  Railway  Directory,  cou- 

371 


RAILROAD  FINANCE 

tainlng  an  official  list  of  tbe  officers  and  directors  of 
the  railroads  in  the  United  States  and  Canada,  together 
with  their  financial  condition  and  amount  of  rolling  stock. 
N.  Y.,  1801-70+       Annual. 

Ashley,    Ossian    Doolittle.      The    General    Railroad    Situation, 
Forum.     N.  Y.,  1895:  xx,  2GG-76. 

The  Association   of  American   Railway   Accounting   Officers,   Re- 
port of  Proceedings.     Chicago,  1888 — .     Annual. 

AvEBY,  Benjamin  Parke.     The  Building  of  the  Iron  Road,  Over- 
land Monthly.     San  Francisco,  1869:  ii,  469-78. 
Central  Pacific. 

Bacon,  Leonard.    Railways  and  the  State,  New  Englander.    New 
Haven,  1871 :  xxx,  713-38. 

Bacon,     Nathaniel     F.     American     International     Indebtedness, 
Yale  Review.     New  Haven,  1900:  ix,  265-85. 
American  Securities  in  Europe. 

Bailey,   William    Francis.    The   Story   of  the   Central   Pacific, 
Pacific  Monthly.     Portland  (Or.).  1908:  six.  13-27,  201-14. 

The  Story  of  the  First  Transcontinental   Railroad ;   its  pro 

jectors.  construction,  and  history.  Fair  Oaks  (Cal.), 
1906.     164  pp. 

Tbe  Story  of  the  Northern   Pacific,   Pacific  Monthly.     Port- 
land  (Or.),  1909:  xxi,  293-310,  383-93 

The  Story  of  the  Oregon   Railroad,   Pacific  Monthly.     Port- 
land  (Or.),  1907:  xvii,  549-61. 

The  Story  of  the  Shasta  Route,   Pacific  Monthly.     Portland 

(Or.),  1907:   xvii,  363-77. 

The  Story  of  the  Union  Pacific,  Pacific  Monthly.     Portland 

(Or.),   1908:   xx,   67-75,  213-21. 

Bailly,    Edward   C.     The   Legal   Basis   of   Rate   Regulation.   Co- 
lumbia  Law   Review.     N.   Y.,   1911:   xi,   532-53. 

Baker,  George  Bartrick.     American  and  British  Railway  Stocks, 
Contemporary   Review.     London,   1801  :    Ix,   593-607. 

Baker,   John   Earl.     Valuation   of   Terminal    Lands,   Journal   of 
Accountancy.     N.  Y.,  1909:  viii,  237-49. 

Baldwin,  Simeon  Eben.     American  Railroad  Law.     Boston,  1904. 
770  pp. 

Baltimore.  Report  of  the  Commission  to  Investigate  the  Affairs 
of  tbe  Western  Mainland  Railroad  Company  and  the 
Interest  of  the  City  Therein,  together  with  tbe  report 
of  Stephen  Little,  expert  accountant,  and  II.  T.  Douglas, 
expert  engineer.  Baltimore,  1893.  754-90+36  pp. 
372 


BIBLIOGRAPHY 

Bancroft,    Hubert    Howe    [Frances    Fuller    Victor].      Chronicles 
of  the  Builders   of  tlie  Commonwealth.     San  Francisco, 
1891 -2.     V  and  vi. 
Biographical  Sketches  of  Railroad  Men. 

History  of  California.     San  Francisco,  1890 :  vii. 

Pacific  Railroads,  495-G35. 

Bankers'  Magazine.     N.  Y.,  1846 — .     Monthly. 

Barker,  Wharton.  Capitalization  of  Railroad  Corporations, 
North  American  Review.     N.  Y.,  1906:  clxxxiii,  717-28. 

Earnaby,  Howard  Clinton  Gilbert.  Analysis  of  Railroad  Re- 
ports ;  heing  a  detailed  analysis,  and  a  comparison  in 
tabulated  form,  of  the  annual  reports  of  railroads  for  the 
hist  two  fiscal  years.     N.  Y.,  1002.     151  pp. 

The    Permanence    of    Railroad    Prosperity,    North    American 

Review.     N.   Y.,  1906:  clxxxiii,  384-93. 

Barnum,  R.  L.  The  Hlinois  Central  Coup,  Van  Norden  Maga- 
zine.    N.  Y.,  1906:  1,  no.  ix,  90-6. 

Barrett,  Charles.  The  Dangers  to  Bondholders  of  Neglecting 
to  Enforce  their  Rights,  Railroad  Gazette.  N.  Y.,  1879: 
xi,  385-6. 

Babtels,  H.  Die  Organization  der  Pennsylvania — Elsenbahn  in 
den  Vereinigten  Staaten  von  Nord  Amerika,  Besonderer 
abdriick  aus  der  Zeitschrift  fiir  bauwesen,  Jahrgang  1878. 
Berlin,  1878.     16  pp. 

Babtol,  W.  H.  The  Danger  of  Friendly  Receiverships,  Popular 
Science  Monthly.     N.  Y.,  1887:  xxxii,  236-40. 

Bascom,  John.  Watered  Stock  Unjustifiable,  Moody's  Magazine. 
N.  Y.,  1907:  iii,  161-4. 

Baxter,  Sylvester.     Remaking  a  Railway ;  a  study  in  eflaeiency. 
Outlook.     N.  Y.,  1910:  xciii,  933-48. 
New  York,  New  Haven,  and  Hartford. 

Beach,  Charles  Fisk,  Jr.  Commentaries  on  the  Law  of  Private 
Corporations.     Chicago,  1891.     2  v. 

Commentaries  on  the  Law  of  Receivers,  with  particular  ref- 
erence to  the  application  of  that  law  to  railway  corpora- 
tions. Revised  by  William  A.  Alderson.  N.  Y.  (2  ed.), 
1897.     950  pp. 

The    Functions    and    Accountability    of    Railway    Directors, 

Railway  and  Corporation  Law  Journal.     N.  Y.,  1891 :  x, 
257-60. 

Same.     Independent     N.  Y.,  1891:  xliii,  1300-1. 

The  Modern  Law  of  Railways,    San  Francisco,  1890.      2  v. 

373 


RAILROAD  FINANCE 

Railway    Federation ;    the   proposed    railway    trusts.     N.    Y., 

1890.     20  pp. 

Railway    Reorganizations,    Anon.     Railway    and   Corporation 

Law  Journal.     N.  Y.,  1887:   i,  97-8. 

Railway    Trusts,    Railway    and    Corporation    Law    Journal. 

N.  Y.,  1889:  vi,  61-4. 

A  Treatise  on  the  Modern  Law  of  Contracts.     Indianapolis, 

1890.     2  V. 

Contracts  of  Railway  Companies,  1409-40;  Reorganiza- 
tion and  Consolidation,  1441-G3. 

Beach,  Charles  Fisk,  Sr.     A  Treatise  on  the  Law  of  Monopolies 
and  Industrial  Trusts.     St.   Louis,   1898.     7()0  pp. 
Combinations  of   Railway  Companies,  404-502. 

Bell,  William  A.  The  Pacific  Railroad,  Fortnightly  Review. 
London,  1869:  xi,  502-78. 

Bennett,  A.  S.  Railroad  Receiverships,  Oregon  Bar  Association, 
Proceedings.     Portland    (Or.),  1890:  vi,  47-53. 

Bebg,  Walter  Oilman,  The  Distinction  Between  Repairs  and 
Improvements,  and  a  Proposed  Classification  of  Railway 
Maintenance-of-way  Expenses,  American  Railway  Engi- 
neering and  Maintenance  of  Way  Association,  Bulletin. 
Chicago,  1903,  no.  xxxiii,  46-85;  Reprinted  as  no.  xlv, 
83-123. 

Same,  Railway  Age.     Chicago,  1903:  xxxv.  578-90. 

Bernard,  Fernand.  .Les  valeurs  de  chemius  de  fer  aux  Etats- 
Unis.     Paris,   1894.     103  pp. 

Berry,  Earl  D.  Trunk  Lines  of  the  Future,  Moody's  Magazine. 
N.  Y.,  1900:  ii,  620-8. 

Bilke,  Henry  Wolf.  The  Northern  Securities  Decision,  Amer- 
ican Law  Register.  Philadelphia,  1904  (n.s.),  xliii, 
358-80. 

Billings,  Frederick.  The  Northern  Pacific  Railroad  Company: 
its  history  and  equitable  rights.  Address  to  tlie  com- 
mittee on  Pacific  railroads  of  the  house  of  representa- 
tives,    n.p.,  1880.     19  pp. 

Bishop,  Judson  W.  History  of  the  St.  Paul  and  Sioux  City 
Railroad,  1864-1881.  Minnesota  Historical  Society,  Col- 
lections.    St.    Paul,    1905:   x,   399-41.5. 

Bispham,  George  Tucker.  Rights  of  Material  Men  and  Em- 
ployees of  Railroad  Companies  as  against  Mortgagees, 
American  Bar  Association,  Report.  Philadelphia,  1880: 
iii,  167-85. 

374 


BIBLIOGRAPHY 

Blake,  Henry  Taylor.  The  Pacific  Railroads  and  the  Govern- 
ment, New  Englander.  New  Haven,  1878 :  xxxvii,  490- 
513,  642-(;9. 

Blaitvelt,  Martin  P.  Railroad  Accounting  under  Government 
Supervision,  Association  of  American  Railway  Account- 
ing Officers,   Report.     Washington,  1908:  xxiii,  63-75. 

Same,   Journal   of  Accountancy.     N.   Y.,   1908:   vi,  81-92. 

Bliss,  George.  Historical  Memoir  of  the  Western  Railroad. 
Springfield    (Mass.),   1863.     190  pp. 

Boone,  Charles  T.  A  Manual  of  the  Law  Applicable  to  Cor- 
porations.    San   Francisco,   1887.     600  pp. 

BowEN,  Ele.     Rambles  in  the  Path  of  the  Steam  Horse.     Phila- 
delphia, 1855.     432  pp. 
Baltimore   and   Ohio. 

BowKER,  Richard  Rogers  (editor).  State  Publications;  a  pro- 
visional list  of  the  official  publications  of  the  several 
states  of  the  United  States  from  their  formation.  N.  Y., 
1899-1908.     4  V. 

and  George   lies    (compilers).     The  Reader's  Guide  in   Eco- 
nomic, Social  and  Political  Science.     N.  Y.,  1891.    169  pp. 
Railroads,  47-51. 

Bradstreet's.     N.  Y.,  1879 — .     Weekly. 

Brandeis,  Louis  Dembitz.  Financial  Condition  of  the  New  York, 
New  Haven  and  Hartford  Railroad  Company  and  of  the 
Boston   and  Maine   Railroad.     Boston,   1907.     77  pp. 

Briscoe,  P.  The  First  Texas  Railroad,  Texas  Historical  Associa- 
tion,  Quarterly.     Austin,   1904:  vii,  279-85. 

Bromley,  Isaac  Hill.  Pacific  Railroad  Legislation,  1862-85. 
Anon.     Boston,   1886.     75  pp. 

Brown,  Reynolds  Driver.  Railroad  Reorganization  Agreements, 
American  Law  Register  and  Review.  Philadelphia,  1897 
(U.S.),  xxxvi,  760-75. 

Bbownson,  Howard  Gray.  A  History  of  the  Illinois  Central 
Railroad.     In   preparation. 

Profits  of  American  Railways,  as  Illustrated  by  the  Illinois 

Central,  Railway  Age  Gazette.     N.  Y.,  1910 :  xlix,  6-10. 

Bullock,  Charles  Jesse.  Control  of  the  Capitalization  of  Pub- 
lic Service  Corporations  in  Massachusetts  (with  dis- 
cussion), American  Economic  Association,  Quarterly. 
Princeton,   1909    (3   ser.),   x,   384-430. 

Bubqess,    J.    L.     Underlying    Principles    and    General    Practices 
of     Railway     Accounting     Departments,     Railway     and 
375 


RAILROAD  FINANCE 

Engineering   Review.    Chicago,    1905:    xlv,   905-6,   924-5. 

Burgess,  Josiar  J.  (compiler).  Burgess'  Railway  Directory, 
containing  an  official  list  of  all  officers  of  the  railroad 
and  telegraph  companies  of  the  United  States  and  Can- 
ada, together  with  their  financial  conditions,  etc.,  com- 
piled from  official  reports.     N.  Y.,  18G17-6+? 

BuBQUNDEB,  B.  B.  The  Declaration  and  Yield  of  Stockholders' 
Rights,  American  Academy  of  Political  and  Social  Sci- 
ence,  Annals.     Philadelphia,   1910:    xxxv,   554-78. 

BtTRB,  Charles  H.  The  Validity  of  Voting  Trust  Provisions  in 
Recent  Railroad  Reorganizations,  American  Law  Reg- 
ister and  Review.  Philadelphia,  1896  (n.s.),  xxxv, 
413-37. 

Byebs,  M.  L.  Economics  of  Railway  Operation.  N.  Y.,  1908. 
672  pp. 

Cau)well,  Henry  Clay.  Railroad  Receiverships  in  Federal 
Courts,  American  Law  Review.  St.  Louis,  1895:  xxx, 
161-87. 

Cajlkinb,  Grosvenor.  The  Massachusetts  Anti-stock-watering 
Law,  Quarterly  Journal  of  Economics.  Boston,  1908: 
xxii,  640-5. 

Calvert,  J.  F.  Depreciation  in  Railway  Accounting,  Journal  of 
Accountancy.     N.  Y.,  1908:  vi,  229-33. 

Canfield,  George  Folger.  The  Northern  Securities  Decision  and 
the  Sherman  Anti-trust  Act,  Columbia  Law  Review. 
N.   Y.,   1904:   iv,  315-37. 

Carb,  William  A.  Receivers'  Certificates.  Pennsylvania  Law 
Series.     Philadelphia,  1895:  i,  593-608. 

Carter,  T.  J.  Railroad  Progress,  Transportation,  and  Manage- 
ment    Springfield    (111.),    1873.     42   pp. 

Caby,  Ferdinand  Ellsworth.  Lake  Shore  and  Michigan  South- 
ern Railway  System  and  Representative  Employees. 
Anon.     Buffalo  and  Chicago,  1900.     947  pp. 

Cary,  John  Watson.  The  Organization  and  History  of  the  Chi- 
cago, Milwaukee  and  St.  Paul  Railway  Company.  Mil- 
waukee, 1893.     392  pp. 

Chamberlain,  Lawrence.  Buying  Railroad  Bonds,  Moody's 
Magazine.     N.  Y.,  1911 :  xii,  249-55. 

The  Principles  of  Bond  Investment.     N.   Y.,  1911.     600  pp. 

Chapman,  Samuel.  American  Methods  of  Railway  Accounting, 
Royal  Statistical  Society,  Journal.  London,  1908:  Ixxi, 
619-48. 

376 


BIBLIOGRAPHY 

Chapman,  W.  W.  The  Northern  Pacific  Railroad :  its  different 
phases  from  1864  to  1880.     Washington,  1880.     15  pp. 

Chesapeake  and  Ohio  Railroad  Company.  History  of  the  Chesa- 
pealie  and  Ohio  Railroad  Company.  Richmond,  1868. 
49  pp. 

Chevalier,  Michel.  Histoire  et  description  des  voies  de  com- 
munication aux  Etats-Unis,  et  des  travaux  d'art  qui  en 
dependent.     Paris,  1840-3.     2  v. 

Society,   Manners  and  Politics  in   the   United   States ;   being 

a    series   of    letters    on    North    America.     Boston,    1839. 
467  pp. 

Les    voies    de   communication    aux    Etats-Unis.     Paris,    1837. 

48  pp. 

Chubch,  William  Conant.  The  Pacific  Railroad,  Galaxy. 
N.  Y.,  1867:  iv,  482-91. 

Churchill,  George  Charles  Spencer  (Eighth  Duke  of  Marl- 
borough). Virginia  Mines  and  American  Rails,  Fort- 
nightly Review.  London,  1891:  Iv,  570-83,  780-97.  Ex- 
tract from  first  article  in  Engineering  Magazine.  N.  Y., 
1891 :  i.  315-23. 

Clark,  Briscoe  Baldwin.  Consolidation  of  Corporations,  Amer- 
ican and  English  Encyclopaedia  of  Law.  Northport 
(N.  Y.),    (2  ed.),  1898:  vi,  800-29. 

Railroad  Securities,   American  and  English  Encyclopjedia  of 

Law.     Northport   (N.  Y.),   (2  ed.),  1903:  xxiii,  795-844. 

Clark,  William  L.  Handbook  on  the  Law  of  Private  Corpora- 
tions.    St.  Paul    (2  ed.),  1907.     721  pp. 

and  William  L.  Marshall.     A  Treatise  on  the  Law  of  Private 

Corporations.     St.  Paul,  1901.    3  v. 

Clarke,  Frederick  Converse.  State  Interference  in  the  Financial 
Management  of  Railroads.  Independent.  N.  Y.,  1891 : 
xliii,  1304-5. 

Clarke,  S.  A.  The  Oregon  Central  Railroad,  Oregon  Historical 
Society,    Quarterly.     Portland,    1906:    xii,    133-8. 

Clarke,  Thomas  Curtis.  The  Building  of  a  Railway.  Cooley, 
The  American  Railway.  N.  Y.,  1889:  1-46.  From  Scrib- 
ner's   Magazine.     N.   Y.,   1888:   iii,   643-70. 

Clemens,  G.  C.  The  Law  of  Corporate  Securities  as  Decided 
in  the  Federal  Courts.     St.   Louis,  1877.     283  pp. 

Cleveland,  Frederick  Alrert.  Advantages  of  an  Independent 
Railway  Audit  to  the  Investor,  Journal  of  Accountancy. 
N.  Y.,  1906:  i,  386-95. 

377 


RAILROAD  FINANCE 

Classification  and  Description  of  Bonds,  American  Academy 

of   Political    and    Social    Science,    Annals.     Philadelphia, 
1907:  XXX,  400-11. 

and  Feed  Wilbur  Powell.     Railroad  Promotion  and  Capital- 
ization in  the  United  States.     N.  Y.,  1909.    368  pp. 
Bibliography,  295-342. 

Clews,  Henry.     Fifty  Years  in  Wall  Street.     N.  Y.,  1908.     1063  pp. 

Problems  of  Railway  Management,  Gunton's  Magazine.    N.  Y., 

1896:  xi,  337-44. 

Clipperton,  Robert  Charles.  Report  on  the  Pennsylvania  Rail- 
road. Reports  from  her  majesty's  diplomatic  and  con- 
sular officers  abroad  on  subjects  of  commercial  interest. 
Part  IV,  commercial,  no.  38.     London,  1884:  9-93. 

Cochrane,  Charles  H.  The  Cost  of  Railroad  Building.  Van 
Norden  Magazine.     N.  Y.,  1907:  ii,  no.  v,  65-72. 

Goes,  Harold  Vinton.  A  Decade  of  American  Railroad  History 
in  Graphic  Form,  Engineering  Magazine.  N.  Y.,  1908: 
xxxiv,  802-14. 

CoHN,  Morris  M.  Railroad  Receiverships ;  questions  of  prac- 
tice concerning  them,  American  Law  Review.  St.  Louis, 
1885:  xix,  400-23. 

CoLBURN,  Richard  Theodore.  The  Pacific  Railway  Debts,  Amer- 
ican Academy  of  Political  and  Social  Science,  Annals. 
Philadelphia,   1895:   v,   684-704. 

Cole,  William  Morse.  Accounting  and  Auditing.  Chicago,  1910, 
479  pp. 

Accounts ;  their  Construction  and  Interpretation,  for  busi- 
ness men  and  students  of  affairs.     Boston.  1908.     345  pp. 

CoLEBROOK,  William  A.  A  Treatise  on  the  Law  of  Collateral 
Securities.  Second  edition  by  George  A.  Benham.  Chi- 
cago, 1898.     814  pp. 

Collier,  M.  Dwight.  Stock  Dividends  and  Their  Restraint,  Amer- 
ican Bar  Association,  _  Report.  Philadelphia,  1884:  vii, 
257-74. 

Collier,    Robert.     Report    on    United    States    Railways.    Foreign 
Office.     Diplomatic  and  Consular  Reports;  United  States. 
Miscellaneous  series,  no.  627.     London.  1905.     45  pp. 
Commercial    and    Financial    Chronicle,    and    Hunt's    Merchaints' 
Magazine.     N.  Y.,  1865—.     Weekly. 

Conner,  H.  P.     Handling  the  Finances.     An  outline  of  the  work- 
ings  of    the   treasury    department    of   the    Pennsylvania 
railroad  company.     Philadelphia,  1905.     11  pp.     P.  R.  R. 
378 


BIBLIOGRAPHY 

Y.  M.  C.  A.,  Railway  transportation ;  a  Course  of  Lectures. 

Cook,  William  Wilson.  The  Corporation  Problem.  N.  Y.,  1893. 
262  pp. 

A  Treatise  on  the  Law  of  Corporations  having  Capital  Stock. 

Chicago  (G  ed.).  1908.       4  v. 

A  Governmental  Holding  Company,  I,  lii-xv ;  from  North 
American  Review,  N.  Y.,  1908:  clxxsvii,  88G-97. 

CooLEY,  Mortimer  Elwyn.  Michigan  Railroad  Appraisal,  Michi- 
gan Political  Science  Association,  Publications.  Ann 
Arbor,  1901:  iv,  285-92. 

CooLEY,  Thomas  McIntire.  State  Regulation  of  Corporate 
Profits,  North  American  Review.  N.  Y.,  1883 :  cxxxvii, 
205-17. 

and  others.  The  American  Railway ;  its  construction,  de- 
velopment, management,  and  appliances.  N.  Y,,  1889, 
456  pp. 

Same.     "The  Railways  of  America."     London,  1890.     456  pp. 

CooLiDGE,  G.  H.  Hill  against  Harriman,  American  Magazine. 
N.  Y.,  1909:  Ixviii,  419-29. 

Cooper,  Francis.  Financing  an  Enterprise ;  a  manual  of  in- 
formation and  suggestion  for  promoters,  investors,  and 
business  men  generally.     N.  Y.  (3  ed.),  1909.     2  v. 

Copeland's  Comparative  Analysis  of  Railroad  Reports.  N.  Y., 
1909 — .     Annual.     Editor:  Clarence  Copeland. 

Cotton,  Joseph  P.,  Jr.  An  Argument  Against  an  Official  Valua- 
tion of  Railroad  Properties,  American  Economic  Associa- 
tion, Quarterly.     Princeton,  1910   (3  ser.)  :  xi,  253-8. 

County,  A.  J.  Incorporation  and  Organization  of  the  Pennsyl- 
vania Railroad  Company.  Philadelphia,  1906.  35  pp. 
P.  R.  R.  Y.  M.  C.  A.,  Railway  Transportation ;  a  Course 
of  Lectures. 

On  the  Question  of  Statistics,  International  Railway  Con- 
gress,   Bulletin.     Brussels.     Forthcoming. 

Same.     Proof  copy.     n.p.   [1910].     42  pp. 

Crane,  W.  A.  The  Future  of  Railroad  Investments,  Harper's 
Magazine.     N.  Y.,  1897:   xcv,  788-90. 

Crawford,  Jay  Boyd.  The  Credit  Mobilier  of  America,  its  origin 
and  history.     Boston,  1880.     229  pp. 

Ceooks,  William.  The  First  Railroad  in  Minnesota,  Minnesota 
Historical  Society,  Collections.     St.  Paul,  1905:  x,  445-8. 

Crouch,  George.     Another  Chapter  of  Erie.     N.  Y.,  1869.    48  pp. 

■ Erie  under  Gould  and  Fisk.    N.  Y.,  1870.     160  pp. 

379 


RAILROAD  FINANCE 

Ceowell,  John  Feanklin.  Railway  Receiverships  in  the  United 
States,  their  origin  and  development,  Yale  Review. 
New  Haven,  1898:  vii,  319-30. 

Cruise,  P.  Baltimore  and  Ohio  Railroad,  Anon.  North  Amer- 
ican Review.     Boston,  1827:  xxv,  62-73. 

Baltimore  and  Ohio  Railroad,  Anon.  North  American  Re- 
view.    Boston,    1829:   xxviii,   16G-86. 

Cbump,  Feank  H.  Operating  Department  Accounts — the  basis 
of  accounting  department  records,  Railway  Age  Ga- 
zette.    N.  Y.,  1908:  xlv,  571-2. 

CuNNiFF,  M.  G.  Increasing  Railroad  Consolidation,  World's  Work. 
N.  Y.,  1902:  iii,  1775-80. 

Cunningham,  Wallace  McCook.  The  Economics  of  Railroad 
Maintenance  of  Way,  Journal  of  Accountancy.  N.  Y., 
1910:  ix,  358-68. 

Cutting,  Robert  L.  The  Northern  Securities  Company  and  the 
Sherman  Anti-trust  Act,  North  American  Review.  N.  Y., 
1902:  clxxiv,  528-35. 

Daggett,  Stuart.     Railroad  Reorganization.  Boston,  1908.  402  pp. 
Bibliographical  note,  389-93. 

Daly,  John  M.  Car  Distribution  and  the  Supervision  of  Fast 
Freight.  Dewsnup,  Railway  Organization  and  Working. 
Chicago,  1906:  80-98. 

Davis,  C.  Wood.  The  Farmer,  the  Investor,  and  the  Railway, 
Arena.     Boston,  1891:  iii,  291-313. 

Davis,  Gheeadi,  and  G.  Morgan  Browne,  Jr.  Car  Trusts  in  the 
United  States,  a  brief  statement  of  the  law  of  contracts 
of  conditional  sale  of  rolling  stock  to  railroads.  N.  Y., 
1894.     49  pp. 

Davis,  John  Patterson.  The  Union  Pacific  Railroad.  Chicago, 
1894.     247  pp. 

The  Union  Pacific  Railway,  American  Academy  of  Political 

and    Social    Science,    Annals.     Philadelphia,    1896:    viii, 
259-301. 

DeBow's  Commercial  Review  of  the  South  and  West.  New  Or- 
leans, 1846-64,  1866-70,  1879-80.  Monthly.  Editor:  James 
Dunwoody  Brownson  DeBow. 

Delano,  Frederick.  The  Application  of  a  Depreciation  Charge 
in  Railway  Accounting,  Journal  of  Political  Economy. 
Chicago,  1908:  xvi,  585-601. 

Deming,  Clarence.    The  Trolley  in  Competition  with  Railroads, 

Engineering  Magazine.    N.  Y.,  1895:  Ix,  823-31. 

380 


BIBLIOGRAPHY 

Debby,  E.  H.  a  Brief  Reply  to  the  Report  of  the  Investigating 
Committee  of  the  Old  Colony  Railroad  Corporation  by 
the  President  of  the  Company.     Boston,  1850.     15  pp. 

Dewing,  Aethub  S.  The  Position  of  Income  Bonds,  as  Illustrated 
by  those  of  the  Central  of  Georgia  Railway,  Quarterly 
Journal   of  Economics.     Boston,   1911 :  xxv,  396-^05. 

Dewsnup,  Ernest  Ritson.  The  Necessity  of  Care  in  the  Inter- 
pretation of  Railway  Statistics  Used  Comparatively,  Rail- 
way Age  Gazette.     N.  Y.,  1910:  xlviii,  1208-13. 

(editor.)     Railway   Organization  and   Working.     A  series  of 

lectures  delivered  before  the  railway  classes  of  the  Uni- 
versity of  Chicago.     Chicago,  1906.     498  pp. 

Dickson,  Charles  A.  Rights  of  Material  and  Supply  Men  in 
Railroad  Foreclosure,  American  Law  Review.  St.  Louis, 
1896:  XXX,  520-34. 

Dillon,  Sidney.  Driving  the  Last  Spike  of  the  Union  Pacific, 
Scribuer's  Magazine.     N.  Y.,  1892:  xii,  2-53-9. 

The  West  and  the  Railroads,  North  American  Review.     N.  Y., 

1891 :  clii,  442-52. 

Dixon,  Frank  Haigh.  Railroads  in  their  Corporate  Relations, 
Quarterly  Journal  of  Economics.  Boston,  1908:  xxiii, 
34-65. 

Dodge,  Grenville  Mellen.  How  We  Built  the  Union  Pacific 
Railway,  and  Other  Railway  Papers  and  Addresses. 
Washington,  1910.  130  pp.  U.  S.  document;  serial 
5658. 

DoBSEY,  Edward  Bates.  English  and  American  Railroads  Com- 
pared. N.  Y.,  1887.  142  pp.  From  American  Society  of 
Civil  Engineers,  Transactions.  N.  Y.,  1886:  xv,  1-78, 
733-90. 

Douglas,  James.  America's  Transcontinental  Lines.  La  Follette,, 
The  Making  of  America.  Philadelphia,  1906:  iv,  270-93. 
Revised  from  Cassier's  Magazine.  N.  Y.,  1901 :  xix,  323- 
40,  469-85. 

Doyle,  John  T.  How  to  Build  Railroads,  Mortgage  Them  for 
Twice  their  Value  Before  they  are  Built,  Keep  Half 
the  Bonds  and  the  Railroad  Also — The  value  of  such 
bonds  as  an  investment,  American  Law  Review.  St. 
Louis,  1895:  xxix,  90.5-12. 

Southern  Pacific  and  others.     The  Central  Pacific  R.  R.  Debt : 

California's    remonstrances    against    refunding    it.     San 
Francisco,  1897.    29  pp. 

381 


RAILROAD  FINANCE 

Memorial  of  the  People  of  California  against  Refunding  the 

Pacific  Railroad  Debt.     San  Francisco,  1896.    4  pp. 
Dredge,    James.     The    Pennsylvania    Railroad :    its   organization, 

construction,  and  management.     London,  1879.     274  pp. 
Deew,  Wolcott.     Are  Our  Railroads  Financially  Strong?     Moody's 

Magazine.     N.  T.,  1907:  iii,  445-9. 
Dubois,  Louis  Paul.     Les  chemins  de  fer  aux  Etats-Unis.     Paris, 

189G.     272  pp. 
Dudley,    William    Frank.     The   Work   of   the   Freight   Auditor. 

Dewsnup,  Railway  Organization  and  Working.     Chicago, 

1906:  335-66. 
Dunn,   Samuel  O.     Valuation  of   Railways,   with   Especial   Ref- 
erence to  the  Physical  Valuation  in  ^Minnesota,  Journal 

of  Political  Economy.     Chicago,  1909:  xvii,  189-205. 
Dunning,    William     Archibald.     Reconstruction,    Political    and 

Economic.     N.  Y.,  1907.     378  pp. 
Credit  Mobilier,  230-4. 
Duband,   Henry    G.     The   Railroads   of   To-morrow :   the   revolu- 
tionary changes  that  are  close  at  hand.  World's  Work, 

N.  Y.,  1907:  xiii,  8465-70. 
Eames,  Edward  L.     The  American  Railroad,  INIagazine  of  Western 

History.     Cleveland,  1890:  xi,  643-8,  xii,  95-9. 
Eaton,    James    Shirley.     Railroad    Operations :     how    to    know 

them  from  a  study  of  the  accounts  and  statistics.     N.  Y., 

1900.     313  pp. 
The  Economist.     London,   1843 — .     Weekly.     Editor:    Francis   W. 

Hirst. 
Edwards,    E.    J.     The    Men    Behind    the    Railroads,    Booklovers' 

Magazine.     Philadelphia,   1003:   i,   335-42. 
Elliott,  Byron  K.,  and  William  F.  Elliott.     A  Treatise  on  the 

Law  of  Railways.     Indianapolis   (2  ed.),  1907.     5  v. 
Elliott,   Charles    Burke.     A   Treatise   on   the   Law   of   Private 

Corporations.     Indianapolis,    (4  ed.)    1911.     1045  pp. 
Ely,    Hugh    B.     Tlie    Insurance    Department — its    functions    and 

growth.     I'hiladelphia,  1905.     7  pp.     P.  R.  R.  Y.  M.  C.  A., 

Railway  Transportation ;  a  Course  of  Lectures. 
The  Engineering  Magazine.     N.  Y.,  1891 — .     Monthly. 
Ebickson,    Halford.     Regulation    of    Public    Utilities.     Madison 

(Wis.),  1911.     66  pp. 
Government   Regulation   of   Security    Issues  of   Public 

Utility  Corporations,  42-66. 
EsTEE,   Morris   M.,   and   others.     Pacific   Railroad   Debts.     Anti- 

382 


BIBLIOGRAPHY 

funding  and  foreclosure  memorial  of  California  state  con- 
vention.    San  Francisco,  1896.     29  pp. 

EusTis,  W.  T.  The  Railroad  Enterprise ;  its  progress,  manage- 
ment and  utility,  New  Englander.  New  Haven,  1851: 
ix.  321-44. 

Evan,  W.  T.  A  Study  of  Reorganizations,  Van  Norden  ilaga- 
zine.     N.  Y.,  1906:  i,  no.  vr,  43-7. 

Fenwick,  Charles  Ghequiere.  The  Judicial  Test  of  a  Reason- 
able Rate  and  Its  Relation  to  a  Federal  Valuation  of 
Railway  Property,  Michigan  Law  Review.  Ann  Arbor, 
1910:   viii,   445-57. 

Febguson,  Edward  A.  (compiler).  Founding  of  the  Cincinnati 
Southern  Railway ;  with  an  autobiographical  sketch. 
Cincinnati,  1905.     163  pp. 

Field,  George  W.  Field  on  the  Law  of  Private  Corporations.  Re- 
vised by  Horace  Gay  Wood.     Albany,  1883.     834  pp. 

The  Financial  Diary.  N.  Y.,  1907—.  Annual.  Editor:  Christo- 
pher A.  Shea. 

The  Financial  Review ;  finance,  commerce,  railroads.  N.  Y,, 
1875 — .     Annual. 

The  Financier.     N.  Y.,  1872—.     Weekly. 

Fink,  Albert.  Cost  of  Railroad  Transportation,  Railroad  Ac- 
counts, and  Government  Regulation  of  Railroad  Tariffs. 
Louisville,  1875.     48  pp. 

Same.     N.   Y.,  1882.     29  pp. 

Fink,  Henry.  Valuation  of  Railroad  Property,  Railway  Age 
Gazette.     N.  Y.,  1908:  xlv,  587-8. 

Fish,  Stuyvesant.  American  Railroads.  Depew,  One  Hundred 
Years  of  American  Commerce.     N.  Y.,  1895 :  i,  98-112. 

The   Development  of  American   Railways.     La   FoUette,  The 

Making  of  America.     Philadelphia,  1906:   iv,  234-43. 

^The  Economic  History  of  a  Long  Established  Factor  in  Amer- 
ican    Transportation.     Chicago     Conference    on     Trusts. 
Chicago,  1900:  555-05. 
Consolidation. 

Seventy  Years  of  Railway  Development,  Railway  Age.  Chi- 
cago, 1902:  xxxiii,  286-7. 

Same     ("Phases    of    railway     progress").     Railway     World. 

Philadelphia,  1902:  xlvi,  283,  294-5. 

Some  Phases  of  the  American  Railroad  Problem,  School   of 

Mines  Quarterly.     N.  Y.,  1907 :  xxix,  1-14. 

Same.     Government.     Boston,   1907:   i,   7-18. 

383 


RAILROAD  FINANCE 

Same.  Extract.  ("Railroad  Over-capitalization;  a  Reval- 
uation Would  Show  Simply  the  Extent  of  Under  Cap- 
italization.") Journal  of  Accountancy.  N.  Y.,  1907:  iv, 
341-4. 

FiSHBACK,  William  Pinckney.  Railway  Financing  as  a  Fine 
Art,  Arena.     Boston,  1897:  xvii,  996-1003. 

Flint,  Henby  M.  The  Railroads  of  the  United  States:  their 
history  and  statistics.     Philadelphia,  1868.     4.52  pp. 

Flower,  Benjamin  Orange.  Twenty-five  Years  of  Bribery  and 
Corrupt  Practices;  or  the  railroads,  the  law  makers,  and 
the  people.  Arena.     Boston,  1904 :  xxxi,  12-49. 

Floweb,  Elliott.  Opening  of  the  Northwest,  Putnam's  Maga- 
zine.    N.  Y.,  1909:  vi,  387-96. 

Chicago,  Milwaukee,  and  Puget  Sound. 

Fowler,  Robert  Ludlow.  Some  Federal  Decisions  Affecting  Rail- 
way Securities,  American  Law  Review.  St.  Louis,  1890 : 
xxiv,  428-41. 

Fowler,  William  Wobthington.  Ten  Years  in  Wall  Street. 
Hartford,  1870.     536  pp. 

Gaines,  Mobrell  W.  The  Value  of  Railroad  Improvements,  En- 
gineering Magazine.     N.  Y.,  1907 :   xxxiii,  849-58. 

Gallup,  Albert.  Railway  Mortgages  and  Receivers'  Debts  in 
the  United  States,  Law  Quarterly  Review.  London,  1888 : 
iv,  300-11. 

Galton,  Douglas.  Reports  to  the  Lords  of  the  Committee  of 
Privy  Council  for  Trade  and  Foreign  Plantations,  on 
the  Railways  of  the  United  States,  with  Supplement. 
London,   1857-8.     2  v. 

Gaefield,  James  Abbam.  Review  of  the  Transactions  of  the 
Credit  Mobilier  Company  and  an  Examination  of  that 
Portion  of  the  Testimony  Taken  by  the  Committee  of 
Investigation  and  Reported  to  the  House  of  Representa- 
tives at  the  Last  Session  of  the  42d  Congress,  which 
Relates  to   Mr.   Garfield.     Washington,    1880.     24  pp. 

Garland,  David  S.,  and  Lucius  P.  McGhee  and  others.  Rail- 
roads, American  and  English  Eucyclopiedia  of  Law. 
Northport    (N.    Y.),     (2    ed.),    1903:    xxiii,    067-794. 

Stock  and  Stockholders,  American  and  English  Encyclopaedia 

of  Law.     Northport  (N.  Y.),  (2  ed.),  1904:  xxvi,  808-1052. 

Gaston,  Joseph.  The  Genesis  of  the  Oregon  Railway  System, 
Oregon  Historical  Society,  Quarterly.  Portland,  1906: 
vli,  105-32. 

384 


BIBLIOGRAPHY 

The    Oregon    Central    Railroad,    Oregon    Historical    Society, 

Quarterly.     Portland,  1902:  iii,  315-2G. 

Gebstnee,  Franz  Anton,  Ritteb  von.  Berichte  aus  den  Vereinig- 
ten  Staaten  von  Nord  Amerika,  ihrer  Eisenbahnen, 
Dampschiffahrten,  Banken,  und  andere  offenliche  Unter- 
nehmungen.     Leipsic,  1839.     67  pp.' 

Comparison  of  the  Railroads  of  Belgium  with  Those  of  the 

United  States,  Franklin  Institute,  Journal.  Philadel- 
phia, 1839   (U.S.),  xxiv,  143-55. 

Die   innern    Communicationen    der    Vereinigten    Staaten    von 

Nord  Amerika.     Vienna,  1842-3.     2  v. 

■ Internal  Improvements  in  the  United  States,  Franklin  In- 
stitute, Journal.  Philadelphia,  1840  (n.  s.),  xxvi,  217- 
30,  289-301,  301-9. 

Railroads  in  the  United  States,  Franklin  Institute,  Journal. 

Philadelphia,  1840  (n.s.).  xxvi,  89-102,  227-30,  301-7; 
American  Railroad  Journal  and  Mechanit-s'  Magazine. 
N.  Y.,  1840-1  ;  xi,  279-81,  298-301,  342-4,  365-8,  xii,  82-8. 
The  first  and  last  articles  in  the  first  series  are  identical 
with  the  corresponding  articles  in  the  second  series. 
Some  of  the  articles  in  each  series  are  accredited  to 
Ludwig  Klein,  who  was  Gerstner's  companion  on  his 
American  tour  and  his  literary  executor. 

Gibbon,  John.  Railroad  Consolidation,  North  American  Review. 
N.  Y.,  1892:  cliv,  251-4. 

Gibson,  George  R.  California  Railroads,  Bankers'  Magazine. 
N.  Y.,  1878:  xxxii,  626-32. 

Gibson's  Manual.  N.  Y.,  1909 — .  Annual.  Editor:  Thomas 
Gibson. 

GiFFEN,  Robert.  American  Railways  as  Investments.  London 
(6  ed.),  1873.     68  pp. 

GiLLiNGHAM,  R.  J.  Passeuger  Receipts.  Philadelphia,  1906.  9 
pp.  P.  R.  R.  Y.  M.  C.  A.,  Railway  Transportation;  a 
Course  of  Lectures. 

GiLMORE,  Eugene  A.  The  Wisconsin  Public  Utilities  Act,  Green 
Bag.     Boston,  1907 :  xix,  517-25. 

Gleed,  Charles  S.  Atchison,  Topeka,  and  Santa  Fe,  Cosmopol- 
itan.    N.  Y.,  1893:  xiv,  465-75. 

Gluck,  James  Fbaseb,  and  August  Becker.  The  Law  of  Re- 
ceivers  of   Corpoi'ations.     N.    Y.    (2  ed.),    1891.     705   pp. 

Godkin,   Lawrence.     The   Courts  as   Railway   Managers,   Albany 
Law  Journal.     Albany,   1886 :  xxxii,  45-7. 
26  385 


RAILROAD  FINANCE 

Graham,  Robert  S.  Central  Pacific  Railroad  Company.  Facts 
regarding  its  past  and  present  management  by  a  stock- 
holder and  former  employee.    San  Francisco,  1889.   40  pp. 

Graser,  Ferdinand  Harry.  Increased  Cost  of  Railroad  Main- 
tenance. Former  standards  must  be  raised,  Railway 
World.     Philadelphia,   1906:   1,   10G7-8. 

Railway  Finance  Fifty  Years  Ago,  Railway  World.  Phila- 
delphia, 1906:  1,  33-5. 

The  Voting  Ti'ust  in  Railway  Finance,  Railway  World.  Phila- 
delphia, 1904:  xlviii,  547-8. 

Graves,  Arthur  M.  Railroad  Accounting  and  the  Hepburn  Law, 
Railway  Age  Gazette.  N.  Y..  1908:  xlv,  1543-4,  1598, 
1629-30,  xlvi,  18-9. 

Gray,  Henry  L.  The  Necessity  of  Depreciation  Reserves,  Rail- 
way Age  Gazette.     N.  Y.,  1910:  xlviii,  1297-8. 

Gray,  Joplin  Chipman.  The  Merger  Case,  Harvard  Law  Re- 
view.    Cambridge,  1904 :  xvii,  474-8. 

Green,  John  Pugh.  Financing  the  Pennsylvania  Railroad. 
Philadelphia,  1905.  0  pp.  P.  R.  R.  Y.  M.  C.  A.,  Rail- 
way Transportation ;  a  Course  of  Lectures. 

Greene,  Joseph  D.  Disbursements  by  Voucher  and  Pay  Roll. 
Philadelphia,  1906.  9  pp.  P.  R.  R.  Y.  M.  C.  A.,  Rail- 
way Transportation ;  a  Course  of  Lectures. 

Greene,  Thomas  Lyman.  Changes  in  the  Form  of  Railroad  Cap- 
ital, Quarterly  Journal  of  Economics.  Boston,  1890:  iv, 
449-57. 

The  Commercial  Basis  for  Railway   Receivership,   American 

Law    Register    and    Review.     Philadelphia,    1894    (n.s.), 
xxxiii,  417-25. 

Corporation  Finance.     N.  Y.,  1897.     181  pp. 

Bonds  and  Stocks,  1-15 ;  Forms  of  Corporate  Enterprise, 
16-32 ;  Railway  Bonds,  33-62 ;  Corporation  Accounting, 
80-101 ;  Public  Policy  towards  Corporation  Profits,  131-145 ; 
Corporation  Reorganizations  and  Receivershi[)s,  140-76. 

New    Features    in    Railway    Finance,    Anon.     Nation.     N.    Y., 

1892:  Iv,  407. 

Railroad  Stock-watering,  Political  Science  Quarterly.  Bos- 
ton, 1891 :  vi,  474-92. 

■ The  Railroads  and  Wall  Street,  Engineering  Magazine.    N.  Y., 

1892:  iii,  372-8. 

Railway    Accounting,    Political    Science   Quarterly.     Boston, 

1892:   vii,  598-612. 

386 


BIBLIOGRAPHY 

Railway  Bonds  and  Stocks,  Independent.    N.  Y.,  1801 :  xliii, 

1303-4. 

The  Security  of  Railroad  Bonds,  Anon.     Nation.      N.  Y.,  1892 : 

liv,  144. 

Gbesham,  Walter  Quinton.  The  Wabash  Railway  Receiver- 
ship, American  Law  Review.  St.  Louis,  1887 ;  xxi, 
104-20. 

Gbosvenok,  William  M.  American  Securities,  the  causes  in- 
fluencing investment  and  speculation,  and  the  fluctua- 
tions in  values,  from  1872  to  1885.  N.  Y.,  1885, 
2704-83  pp. 

GwYN,  James  A.,  and  Henry  H.  Skyles.  Railroads,  Cyclopedia 
of  Law  and  Procedure.     N.  Y.,  1909 :  xxxiii,  1-1404. 

Hadley,  Arthur  Twining.  American  Railroad  Statistics,  Amer- 
ican Statistical  Association,  Publications.  Boston,  1889 : 
i,  241-53. 

Railroad  Abuses  at  Home  and  Abroad,  New  Princeton  Re- 
view.    N.  Y.,  1886:  ii,  355-65. 

Railroad  Economy  in  the  19th  Century.     The  19th  Century ; 

a  review  of  progress  during  the  past  one  hundred  years  in 
the  chief  departments  of  human  activity.  N.  Y.,  1901 : 
443-53. 

The  Railroad  in  Its  Business  Relations.  Cooley,  The  Amer- 
ican Railway.  N.  Y.,  1889:  344:69.  From  Scribner's 
Magazine.     N.  Y.,  1888 :  iv,  473-88. 

Railroad     Problems     of     the  Immediate     Future,     Atlantic 

Monthly.     Boston,    1891:    Ixvii,  380-93. 

Railroad   Transportation ;    its  history   and   its   laws.     N.    Y., 

1885.     209   pp. 

Haines,  Henry  Stevens.  American  Railway  Management.  N.  Y., 
1897.    368  pp. 

Problems  in  Railway  Regulation.     N.  Y.,  1911.     582  pp. 

Restrictive  Railway  Legislation.     N.  Y.,  1905.     355  pp. 

Hale,  Arthur.  Railroad  Organization,  Railroad  Gazette.  N.  Y., 
1902:   xxxiv,  264-5. 

Hale,  Nathan.  Poussin  on  American  Railroads,  Anon.  North 
American  Review.     Boston,  1837:  xliv,  435-01. 

Hamilton,  Adelbert.  The  Great  Railway  Debt,  Forum.  N.  Y., 
1888:  vi,  155-66. 

Hand-book  of  Railroad  Securities ;  description,  income,  prices, 
dividends.     N.  Y.,  1883 — •    Semi-annual. 

Hansel,  Charles.     State   Valuation   of   Railroads — some   of   the 

387 


RAILROAD  FINANCE 

problems.  North  American  Review.     N.  Y.,  1907 :  clxxsv, 
485-94. 

Same,   Abridged,   Railway  Age.     Chicago,   1907:   xliv.  281-2. 

Hansen,  Wilhelm  G.  Capitalization  of  Railways,  Government 
Accountant.     Washington,   1911:   v,  65-74,   120-6,   165-71. 

Hardt,  Walter  K.  Railway  Maintenance  of  Way,  Journal  of 
Accountancy.     N.  Y.,  1907:  iii,  438-48. 

Hardy,  Charles  A.  The  Power  of  a  Court  of  Equity  to  Author- 
ize the  Issue  of  Receivers'  Certificates,  Central  Lf>w 
Journal.     St.    Louis,    1897:   xliv,  344-7. 

Harold,  J.  Chapters  on  Erie  and  Atlantic  and  Great  Western. 
London,  1879.     112  pp. 

Haeriman,  Edward  Avery.  Voting  Trusts  and  Holding  Com- 
panies, Yale  Law  Journal.  New  Haven,  1904:  xiii, 
109-23. 

Harris,  Robert  L.  The  Pacific  Railroad — Unopen,  Overland 
Monthly.     San  Francisco,  1869:  iii,  244-52. 

Haetman,  Karl.  Praktisches  Handbuch  iiber  die  Anlage  von 
Eisenbahnen ;  ihre  Kosten  unterhaltung,  und  ihren  Er- 
trag  iiber  die  Anfortigung  und  Priisung  giiss-und  Sta- 
beiserner  scheinen,  und  die  Einrichtung  der  Dampf-und 
anderen  Eisenbahnwagen.  Augsberg,  1837.  544  pp. 
Bibliography,  530-44. 

Harvey,  Richard  Selden.  Rights  of  the  Minority  Stockholder. 
N.    Y.,    1909.     164  pp. 

Hasse,  Adeliade  Rosalie  (compiler).     Index  of  Economic  Mate- 
rial  in   Documents  of  the  States  of  the   United   States. 
Washington,  1907—. 
A  volume  for  each  state. 

Hassler,  Charles  W.  Railroad  Rings  and  their  Relation  to 
the  Railroad  Question  in  the  Country.     N.  Y.,  1876.  29  pp. 

Hatfield,  Henry  Rand.  Modern  Accounting.  N.  Y.,  1909. 
367  pp. 

Raymond,  Creed.  The  Central  Pacific  Railroad  Company;  its 
relations  to  the  government.  It  has  performed  every 
obligation.  Argument  before  select  committee  of  the 
United  States  senate.  San  Francisco,  1888.  256  pp. 
Rejoinder  to  report  of  Pacific  railway  commission. 

Hazard,  Rowland  G.  The  Credit  Mobilier  of  America.  Provi- 
dence, 1881.    42  pp. 

Heinsheimer,  Norbert.     The  Species  of  Contract  Known  as  Car 
Trust,   Counsellor.     N.   Y.,   1892:   i,   194-8. 
388 


BIBLIOGRAPHY 

Helliwell,  Arthur  L.  A  Treatise  on  Stock  and  Stockholders, 
Governing  Watered  Stock,  Trusts,  Consolidations  and 
Holding  Companies.     St.  Paul,  1903.     1071  pp. 

Henry,  George  Garr.     How  to  Invest  Money.     N.  Y.,  1908.     121 

pp. 

Railroad     Mortgage    Bonds,     23-29;     Railroad    Equip- 
ment Bonds,  40-50. 

Heydon,  Frederick  E.  Comment  on  the  Theoretical  Movement 
of  Package  Freight,  Government  Accountant.  Washing- 
ton,   1911:    iv,   394-400. 

The  Movement  of  Carload  Freight,  Government  Accountant. 

Washington,   1911 :  iv,  439-45. 

Operating   Revenues,   Government   Accountant.     Washington, 

1911 :  V,  219-88. 

The  Revision  of  Way  Bills,  Government  Accountant.  Wash- 
ington, 1910 :  iv,  345-8. 

High,  James  Lambert.  A  Treatise  on  tlie  Law  of  Receivers. 
Fourth  edition  by  Shirley  T.  High.  Chicago,  1910. 
1102  pp. 

Hill,  Benjamin  T.  The  Beginnings  of  the  Boston  and  Worces- 
ter Railroad,  Worcester  Society  of  Antiquity,  Proceed- 
ings,  1901.     Worcester,    1902:    527-76. 

Hnx,  James  Jerome.     Highways  of  Progress.    N.  Y.,  1910.   353  pp. 

Hillyer's  American  Railroad  Magazine.  N.  Y.,  1859-614- ? 
Monthly. 

Hinsdale,  Elizub  Bruce.  History  of  the  Long  Island  Railroad 
Company.     N.  Y.,  1898.     34  pp. 

HiRSCHL,  Andrew  J.  Combination,  Consolidation  and  Succes- 
sion of  Corporations.     Chicago,  1896.     590  pp. 

Hittell,  Theodore  Henry.  History  of  California.  San  Fran- 
cisco.    1897.     IV. 

Pacific  Railroads,  447-95,  and  passim. 

HoAB,  George  Frisbee.     Autobiography  of  Seventy  Years.     N.  Y., 
1903.     i. 
Credit  Mobilier,  314-24. 

HoDGSKiN,  J.  R.  One  Reason  Why  Railroads  are  Badly  Man- 
aged, Anon.     Nation.     N.  Y.,  1868 :  vl,  464-0. 

Railroad  Fraternity,   Anon.     Nation.     N.  Y.,   1868:  vi,  406-8. 

Railroad  Mania,  Anon.     Nation.     N.  Y.,  1869,  viii,  185-7. 

HoFF,  Wilhelm,  and  Felix  Schwabach.  Nordamerikanlsche 
Eiseubahnen  :  ihre  Verwaltung  uud  Wirthschaftsgebarung. 
Berlin,  1906.     377  pp. 

389 


RAILROAD  FINANCE 

■ Same.     North  American  Railroads ;  their  administration  and. 

economic  policy.     N.  Y.,  1907.     447  pp. 
Hollander,    Jacob    Harry.     The    Cincinnati    Southern    Railway : 

a  study  in  municipal   activity.     Baltimore,   1894.     90  pp. 

Johns  Hopkins  University,  Studies  in  Historical  and  Po- 
litical  Science,   xii,   1-96. 
HOLLISTER,  OVANDO  James.     Life  of  Schuylcr  Colfax.     N.  Y.,  188H. 

536.  pp. 
Credit  Mobilier,  381-419. 
HoLZ,  Hermann.     Railroad  Ownership  and  Speculation.  Van  Nor- 

den  Magazine.     N.  Y.,  1907 :  i,  no.  x,  25-31. 
How,  Francis.     Maintenance  of  Way  and  Structures,  Journal  of 

Accountancy.     N.   Y.,   1906 :   i,  372-8. 
Howell,  Thomas  P.,  Henry  F.  Stitzell,  and  others.     Receivers 

(Railroad),  American  and  English  Encyclopedia  of  Law, 

Northport  (N.  Y.),  1892:  xx,  329-40. 
Rowland,  Edward,     A  Railroad  Study,  Harper's  Magazine.    N.  Y., 

1877 :  Iv,  014-22. 
Accounts. 
Hudson,    James    Fairchild.     The    Railways    and    the    Republic. 

N.  Y.,  1886.     489  pp. 
Hudson,   S.   M.     An   Analysis   of   Railroad    Operations,    Railway 

Age.     Chicago,  1901:  xxxii,  337-8. 

Depreciation,   Railway   Age.     Chicago,   1907:    xliv,    175-(). 

Efficient   Accounting,    Railway    Age.     Chicago,    1904:    xxxvli, 

89-91. 
Railroad  Cost  Accounting,  Railway  Age  Gazette.    N.  Y.,  1908: 

xlv,  21-3,  68-70. 
Huebner,   Grover  Gerhardt.     Fast  Freight  Lines,   Railway   Age 

Gazette.     N.  Y.,  1910:  xlviii,  316-8. 
Huebner,    Solomon.     Who    Owns    the    Railroads?      La    Follette, 

The  Making  of  America.     Philadelphia,  1906:  iii,  330-44. 

From  American  Academy  of  Political  and  Social  Science, 

Annals,       Philadelphia,       1903:       xxii,       475-90.     ("The 

Distribution      of      Stockholders      in      American      Rail- 
ways.") 
Hughes,  Sarah  Forbes  (editor).     Letters  and  Collections  of  John 

Murray   Forbes.     Boston.    1899-1900.       2  v. 
Hungerford,    Edward.      Building    a    Railroad — and    Rebuilding, 
Outing.     N.  Y.,   1909:   liv,  3-17. 

• The  Modern  Railroad.     Chicago.  1911.     476  pp. 

Huntingdon,  Collis  Potter.     Address  Before  the  Committee  on 

390 


BIBLIOGRAPHY 

Pacific  Railroads  of  the  House  of  Representatives,  March 
12,  1896.     n.p..  n.d.     12  pp. 

A    Plea    for    Railway    Consolidation.      McCain,    Compendium 

of    Transportation    Theories.      Washington,    1893:    251-9. 
From  North  American  Review.     N.  Y.,  1891 :  cliii,  272-82. 

Relations  of  the  Pacific  R.  R.  Companies  to  the  U.  S.  Gov- 
ernment Growing  out  of  Bonds  Advanced  in  Aid  of  Con- 
struction,    n.p.,  n.d.     22  pp. 

HuTCHiNS,  Stephen  C.  Railroads  and  Transportation.  Chad- 
bourne.  The  Public  Service  of  New  York.  Boston,  1882: 
i,  475-562. 

Illinois  Central  Railroad  Company.  1851-1901,  Illinois  Central 
Railroad  Company  Fiftieth  Anniversary.  Chicago,  1901. 
Unpaged. 

Ingersoll,  H.  H.  Rights  and  Remedies  of  General  Creditors 
of  Mortgaged  Railways,  Yale  Law  Journal.  New  Haven, 
1910:   xix,  622-38. 

International  Railway  Congress  Association.  Ofl3ce  Bibliogra- 
phique  International.  Bibliographia  Universalis.  Monthly 
Bibliography  of  Railways.  Bulletin.  Brussels,  1888— : 
ii — . 

IviNS,  William  Mills,  and  Herbert  Delavan  Mason.  The  Con- 
trol of  Public  Utilities  in  the  Form  of  an  Annotation 
of  the  Public  Service  Commission's  Laws  of  the  State 
of  New   York.     N.   Y.,   1908.     1149  pp. 

Jahrbuch  Amerikanischer  Eisenbahnen,  ein  Handbuch  fiir  Bank- 
iers  uud  Kapitalisten.  Berlin,  1900.  Editors :  L.  Bleek, 
B.  Unholtz. 

Jeans,  James  Stephen.  Development  of  Railroads  at  Home  and 
Abroad.   Fortnightly  Review.     London,  1894:  Ixi,  365-76. 

Railway  Problems ;  an  inquiry  into  the  economics  of  railway 

working  in  different  countries.     London,  1887.     560  pp. 

Jenks,  Jeremiah  Whipple,  Edwin  Walter  Kemmerer,  and  J.  A. 
Tillinghast.     Securities  of  Industrial  Combinations  and 
Railroads,   United  States  Industrial  Commission,  Report' 
Washington,   1901:  xiii,  913-45.     U.   S.  document;   serial 
4343. 

Jeuvis,  John  Bloomfield.  Railway  Property;  a  treatise  on  the 
construction  and  management  of  railways.  N.  Y.,  1861. 
341  pp. 

Johnson,   Emory   Richard.     American   Railway   Transportation. 
N.  Y.   (2  ed.),  1909.     434  pp. 
391 


RAILROAD  FINANCE 

Elements  of  Transportation.  A  discussion  of  steam  rail- 
road, electric  railway,  and  ocean  and  island  water  trans- 
portation.    N.  Y.,  1909.     360  pp. 

• and  Groveb  Gebhardt  Huebnkb.     Railroad  Traffic  and  Rates. 

N.  Y.,  1911.     2  V. 

Johnson,  Theodore.  The  Richmond  and  Danville  System,  Maga- 
zine of  Western  History.  Cleveland,  1890:  xii,  99- 
106. 

Joi-INE,  Adrian  Hoffman.  Railway  Reorganization,  Maryland 
State  Bar  Association,  Report.  Baltimore,  1900:  v,  101- 
42. 

Same,  Abridged,  American  Lawyer.     N.  Y.,  1900:  viii,  507-14. 

Same,  Abridged,  Brief.     N.  Y.,  1902 ;  iv,  1-23. 

Same,  Abridged.  Chicago  Law  Journal.     Chicago.  1902 :  xvii, 

224-7,  243-7,  255-8. 

Jones,  Leonard  Augustus.  Payment  for  Corporate  Shares  in 
Property  Instead  of  Money,  American  Law  Review.  St. 
Louis,  1884:  xviii,  256-60. 

Receivers   of   Railways,    Southern   Law   Review.      St.    Louis, 

1878    (U.S.),  iv,   18-49. 

A  Treatise  on  the  Law  of  Corporate  Bonds  and  Mortgages, 

being  the  third  edition  of  "Railroad  Securities,"  revised. 
Indianapolis,  1907.     849  pp. 

A  Treatise  on  the  Law  of  Pledges,  Including  Collateral  Se- 
curities.    Indianapolis,  1901.     861  pp. 

Jones,  S.  Walter.  A  Treatise  on  the  Law  of  Insolvent  and 
Failing  Corporations.  Kansas  City  (Mo),  1908.  1011 
pp. 

Justice,  Jefferson.  Merchandise  Freight  Receipts.  Philadel- 
phia, 1906.  11  pp.  P.  R.  R.  Y.  M.  C.  A.,  Railway  Trans- 
portation ;  a  Course  of  Lectures. 

Kayleb,  R.  S.  Ohio  Railroads,  Ohio  Archsological  and  His- 
torical Society,  Quarterly.     Columbus,  1900:  ix,  189-92. 

Keefee,  Horace  A.  The  Development  of  Transportation  Systems 
in  the  United  States ;  financial  policies  and  the  results 
to  which  they  are  Leading,  Association  of  Engineering 
Societies,   Journal.     N.   Y.,   1892:    xi,   332-43. 

Kennedy,  J.  H.  The  American  Railroad;  its  inception,  evolu- 
tion and  results.  Magazine  of  Western  History.  Cleve- 
land, 1888-90 :  vii,  506-xi,  362,  passim. 

Keys,  C.  M.  As  Many  Railroad  Methods  as  Railroad  Kings, 
World's  Work.     N.  Y.,  1905:  x.  6652-9. 

——Bond   Redemption   and   Sinking   Funds,    American   Academy 

392 


BIBLIOGRAPHY 

of   Political   and    Social    Science,   Annals.      Philadelphia, 

1907:    XXX,    213-29. 
Cassatt   and   His   Vision,    World's   Work.      N.    Y.,   1910:    xx, 

13,187-204. 
Pennsylvania, 
A  Corner  in  Pacific  Railroads,  World's  Work.     N.  Y.,  1905: 

ix,  5816-22. 
An   Era   of   Better  Railroads,   World's   Work.     N.   Y.,   1909: 

xvii.  11.238-43. 
Harriman,  World's  Work.     N.  Y.,  1907:  xiii,  8455-64,  8536-52, 

8G51-64,   8791-803. 
The   Newest   Railroad  Power,   World's   Work.     N.   Y.,   1905: 

X,  6302-13. 
Rock  Island. 
The    Overlords    of    Railroad    Traffic,    World's    Work.     N.    Y. 

1907:  xiii,  8437-45. 
The  Shifting  Railroad  Control.     Six  months  of  rapid  change 

since    the    passing    of    Harriman.     The    eight    overlords 

of    to-day,    and    their   kingdom,    World's    Work.     N.    Y., 

1910:   XX,   13.04.5-!5G. 
King,     Landreth     H.     Railroad     Administration     and     Finance. 

Railway  World.     Philadelphia,   1906:   1,  1024-5. 
KiRKMAN,  iMARSHALL  MoNROE.     Divisiou  of  Railway  Expenses  and 

Earnings  and  the  Limitations  of  Accounts  in  Connection 

Therewith.      Chicago,   1886.     75   pp. 

Hand  P.ook  of  Railway  Expenditures.    Chicago,  1881.    Ill  pp. 

How   to   Collect   Railroad   Revenue   without   Loss.     Chicago, 

1885.     324  pp. 
Railway  Expenditures ;  Their  Extent,  Object,  and  Economy. 

Chicago,  1880.     2  v. 

Science  of  Railways.     N.  Y.   (rev.  ed.),  1904.     19  v. 

Financing,  Constructing  and  Maintaining,  iii ;  Disburse- 
ments   of    Railways,    vii ;    Fiscal    Affairs — Collection    of 

Revenue,  ix ;  General  Fiscal  and  Other  Affairs,  x ;  Build- 
ing and  Repairing  Railways,  xiii. 
Knox,    Philander   Chase.     The   People,   the   Railroads   and   the 

National  Authority,  Albany  Law  Journal.     Albany,  1908: 

Ixx,  144-9. 

Same.    n.p.    1908.    26  pp. 

KuPKA,     Peter    Friedrich.       Aniericanischen     Eisenbahnen.     Vi' 

enna,  1877.     108  pp. 
■ (compiler).     Die  Verkehrsniittel    in   den   Vereinigten   Staaten 

von  Nordamerika.     Leipsic,  1883.     413  pp. 
893 


RAILROAD  FINANCE 

Lane,  Franklin  Knight.  Railroad  Capitalization  and  Federal 
Regulation,  Review  of  Reviews.  N.  Y.,  1908:  xxxvii, 
711-4. 

Langdell,  Christophkb  Columbus.  Tbe  Northern  Securities 
Case  and  the  Sherman  Anti-trust  Act,  Harvard  Law 
Review.     Cambridge,   1903:   xvi,   539-54. 

The  Northern  Securities  Case  under  a  New  Aspect,  Har- 
vard Law  Review.     Cambridge,  1903 :  xvii,  41-4. 

Laniek,  Robert  S.  Harriman  the  Absolute,  Review  of  Reviews. 
N.  Y..  1909:  xv,  465-74. 

Lansing,  Gerrit  L.  The  Growth  and  Effect  of  Railway  Con- 
solidation, Popular  Science  Monthly.  N.  Y.,  1883:  xxii, 
577-89. 

Relations    Between    the    Central    Pacific    Railroad    Company 

and  the  United  States.     Summary  of  facts.     San  Fran- 
cisco, 1889.     70  pp. 

Rejoinder  to  report  of  Pacific  railway  commission. 

Labned,  Josephus  Nelson  (compiler).  The  Literature  of  Amer- 
ican  History.     Boston,   1902.     588  pp. 

Larrabee,  William.  The  Railroad  Question ;  a  historical  and 
practical  treatise  on  railroads,  and  remedies  for  their 
abuses.     Chicago,  1893.     488  pp. 

Latimer,  J.  D.  The  Greatest  Year  of  New  Railroad  Enterprise, 
Review  of  Reviews.     N.  Y.,  1906:  xxxiv.  449-60. 

Latbobe,  John  Hazlehubst  Bonival.  The  Baltimore  and  Ohio 
Railroad.     Personal  recollections.     Baltimore,  1868.    26  pp. 

Laughlin,  James  Laurence.  Latter-day  Problems.  N.  Y.,  1909. 
302  pp.  The  Valuation  of  Railways,  177-204.  From 
Scribner's  Magazine.     N.  Y.,  1909:  xlv,  434-41. 

Lavoinne,  Edouard,  and  F.  Pontzen.  Les  chemins  de  fer  en 
Amerique.     Paris,  1880.     2  v. 

Lawrence,  J.  C.  Valuation  of  Railways  in  Washington.  Railway 
Age  Gazette.     N.  Y.,  3910:  xlviii,  359-04. 

Lawson,  W.  R.  American  Railroad  Reorganization,  Bankers' 
Magazine,     London,  1894 :  Ivii,  602-703. 

American  Securities  in  Europe,  1845-1905,  Bankers'  Maga- 
zine.    N.  Y.,  1905:  Ixxi,  498-508. 

Lee,  Ivy  Ledbetter.  Railroad  Valuation,  Bankers'  Magazine. 
N.  Y.,  1907:  Ixxv.  81-94. 

Lee,  John  Wesley  Mltrray.  A  Bibliography  of  the  Baltimore 
and  Ohio  Railroad  Company,  1827  to  1879.  London, 
1879.     143  pp. 

394 


BIBLIOGRAPHY 

Lee's  Manual  of  Financial  Values  and  Fluctuations  [1890-1896]. 
N.  Y.,  1896.     535  pp.     Editor:  J.  M.  Lee. 

Lehman,  John.  Receivers,  Cyclopedia  of  Law  and  Procedure. 
N.  Y.,  1910:  xxxiv,  1-512. 

Leighton,  George  Bridge.  A  Short  Consideration  of  Some  of 
the  Factors  in  the  New  England  Railway  Problems. 
Monadnock    (N.  IL),  1908.     24  pp. 

Leland,  Cyrus  Powers.  History  of  the  Lake  Shore  and  Michi- 
gan Southern  Railway,  Association  of  Engineering  Soci- 
eties, Journal.  N.  Y.,  1887:  vi,  340-51.  From  annual 
reports,  1877-9. 

Leland  Stanford  Junior  University.  Hopkins  Railway  Library. 
Catalogue.  Compiled  by  Frederic  John  Teggart.  Palo 
Alto   (Cal.),  1895.     231  pp. 

Lewis,  George  Henry.  National  Consolidation  of  the  Railways 
of  the  United  States.     N.  Y.,  1893.     326  pp. 

Lewis,  Lawrence.     A  Feat  in  Railroad  Building,  World's  Work. 
N.  Y.,  1905:  xi,  6859-70. 
Denver,  Northwestern,  and  Pacific. 

Leyen,  Alfred  Friedrich  von  der.  Die  Finanz  und  Verkehrspol- 
itik  der  Nordamerikanischen  Eisenbahnen.  Ein  Beitrag 
zur  Beurtheilung  der  neuesten  Eisenbahnkrisis,  Archiv 
Fiir  Eisenbahnwesen.     Berlin,  1894 :  xvii,  1-70. 

Same,    Extract.      "Noi'th    American    Railway    Securities    in 

Europe."  Translation  by  Eugene  Germain.  United 
States  Consular  Reports.  Washington,  1894:  xlv,  192-6. 
U.  S.  document :  serial  3260. 

Die  Nordamerikanische  Eisenbahnen  in  ihren  wirtschaflichen 

und  politischen  Beziehungen.  Leipsic,  1885.  402 
pp. 

Lisle,  R.  Mason.  Foreclosure  of  Railway  Mortgages,  American 
Law  Review.     St.  Louis,  1887:  xx,  867-88. 

LisMON,  F.  J.  Collateral  Trust  Bonds,  Moody's  Magazine.  N.  Y., 
1906 :  i,  580-2. 

Livingston,  John.  The  Erie  Railway;  its  history  and  man- 
agement from  1832  to  1875.     N.  Y.,  1875.     92+36  pp. 

LocKWOOD,  V.  H.  How  to  Reform  Business  Corporations,  North 
American  Review.     N.  Y.,  1897:  clxiv,  294-304. 

Lord,  Eleazar.  A  Flistorical  Review  of  the  New  York  and  Erie 
Railroad.     N.   Y.,  1855.     223  pp. 

Losing,  Lewis  P.  Early  Railroads  in  Boston,  Bostonian.  Boston, 
1894:  i,  299-309. 

395 


RAILROAD  FINANCE 

Lough,  William  H.  Corporation  Huance :  an  exposition  of  the 
principles  and  methods  governing  the  promotion,  organ- 
ization, and  management  of  modern  cox'poratious.  John- 
son, Modern  business,    iv.     N.  Y.,  1910.     480  pp. 

Lowell,  Abbott  Lawkence,  and  Francis  C.  Lowell.  The  Trans- 
fer of  Stock  in  Private  Companies.  Boston,  1884.  297 
pp. 

LowENHAUPT,  Frederick.  Investment  Bonds,  Their  Issue  and 
Their  Place  in  Finance ;  a  book  for  students,  investors, 
and   practical   financiers.     N.   Y.,   1908.     253   pp. 

Railroad  Bonds,  Moody's  Magazine.     N.  Y.,  1909:  viii,  361-5. 

LusTiG,  Hugo.  Nordamerikanische  Eisenbahnwerte.  Handbuch 
fiir  bankiers  und  kapita  listen.  Berlin,  1909.  259 
pp. 

Same.    Etudes  sur  les  chemins  de  fer  de  TAmerique  du  Nord ; 

manual    pour    banquiers    et    capitalistes.      Paris,    1910. 
268  pp. 

LuTZ,  Charles  A.  The  Purpose  of  Examinations  of  Accounts 
of  Common  Carriers  under  the  Provisions  of  the  Twen- 
tieth Section  of  the  Act  to  Regulate  Commerce,  The 
Government  Accountant.     Washington,   1909 :    iii.    14-7. 

Lyles,  James  H.  (compiler).  Official  Railway  Manual  of  the 
Railroads  of  North  America.     N.  Y.,  1869?-71  +  ? 

McClure,    Alexander    Kelly.     Old-time   Notes   of   Pennsylvania. 
Philadelphia,  1905.     I. 
Railroads,  passim. 

McCooK,  John  J.  Railway  Trusts,  Railway  and  Corporation 
Law  Journal.     N.  Y.,  1890:  vii,  201-2. 

McCrary,  George  W.  Of  the  Enfoi-cement  of  Debts  Contracted 
and  Liabilities  Incurred  by  Receivers  of  Railroads,  Amer- 
ican Law  Review.     St.  Louis,  1888:  xvii,  831-48. 

McCrea,  James.  Statement  of  Pennsylvania  Lines  West  of  Pitts- 
burgh In  Connection  with  the  Proposition  to  Fix  a  Maxi- 
mum Rate  of  Two  Cents  Per  Mile,  Which  Railways 
may  Charge  for  Transportation  of  Passengers  in  the 
State  of  Ohio.  Pittsburgh,  1906.  11  pp. 
Cost  accounts. 

McGregor,  John.  The  Progress  of  America  from  the  Discovery 
by  Columbus  to  the  Year  1846.  London,  1847.  ii. 
Canals  and  Railroads  of  the  United  States,  697-747. 

Machen,  Arthur  W.,   Jr.    A  Treatise  on  the   Modern  Law  of 
Corporations.      Boston,   1908.     2  v. 
396 


BIBLIOGRAPHY 

McLain,  Frank  D.  American  Railroads  as  Safe  Investments, 
Railway  World.     Philadelphia.   1905:   xlix. 

Extent  and  Nature  of  Railroad  Securities,  495-6; 
Anthracite  Carrying  Systems,  515-7;  Trunk  Lines,  535-7; 
Pacific  Railway  Systems,  555-7 :  Southern  and  Gulf  Lines, 
575-6 ;  Systems  of  the  middle  West,  595-7. 

McPherson,  Logan  Grant.  The  Working  of  the  Railroads. 
N.  T.,  1907.     273  pp. 

McVey,  Frank  Le  Rond.  Railroad  Transportation;  some  phases 
of  its  history,  operation  and  regulation.  Chicago,  1910. 
408  pp. 

Mahl,  William.  Equipment  Depreciation  and  Renewal,  Railroad 
Gazette.     N.  Y.,  1907:  xliii,  418-9. 

Equipment  Depreciation  and  Replacement,  Railway  Age  Ga- 
zette.    N.  Y.,  1910:  xlviii,  440-2. 

Equipment  Depreciation  and  Replacement,  Railway  Age  Ga- 
zette.    N.  Y.,  1910:  xlviii,   1249-50. 

Malcom  and  Coombe's  Manual  of  Railroad  and  Industrial  Se- 
curities.    N.  Y.,  ]905-(;.     Annual. 

Malzieux,  M.  Travaux  publiques  des  Etats-Unis  d'Amerique 
en  1870.     Paris,  1873.     572  pp. 

The  Manual  of  Statistics;  stock  exchange  handbook.  N.  Y., 
1879—.  Annual.  Editors :  Charles  M.  Goodsell,  Henry  E. 
Wallace. 

Manufacturers'  Record.  Baltimore,  1882—.  Weekly.  Editor: 
Richard  H.  Edmonds. 

Marcosson,  Isaac  Frederick.  How  to  Invest  Your  Savings. 
Philadeli)hia,  1907.     120  pp. 

Marks,  William  Dennis.     The  Finances  of  Engineering.  Frank- 
lin  Institute,  Journal.     Philadelphia,  190G:  clxi,  197-211. 
Valuation   of  steam   railways.     204-9. 

Mabtin,  Joseph  G.  (compiler).  Martin's  Boston  Stock  Market, 
Eighty-eight  years,  from  January,  1789,  to  January,  1886, 
comprising  the  annual  fluctuations  of  all  public  stocks 
and  investment  securities  .  .  .  with  the  semi-annual 
dividends  paid  by  each.     Boston,  1886.     152  pp. 

Mason,  Frank  H.  American  Railway  Securities  in  Germany, 
United  States  Consular  Reports,  1894:  xlvi,  383-6.  U.  S. 
document ;  serial  3330. 

The    Prussian    Commission    on    American    Railroads,    United 

States  Consular  Reports.     1902:  xlix,  217-9.     U.  S.  docu- 
ment ;  serial  4334. 

397 


RAILROAD  FINANCE 

RfaBsachusetts.     Commission  on  Commerce  and  Industry.  Report. 
Boston,  1908.     238  pp. 

The  Proposed  Control  of  the  Boston  and  Maine 
by  the  New  York,  New  Haven,  and  Hartford, 
8-50 ;  Disposition  to  be  Made  of  IMassachusetts 
Street  Railways  Now  Controlled  by  the  New  York,  New 
Haven  and  Hartford,  50-7 ;  Massachusetts  Statute  Regu- 
lating the  Issue  of  New  Stock  by  Public-service  Corpora- 
tions, 57-G9 ;  Lease  of  Boston  and  Albany  should  not 
be  Assignable,  69-70;  New  Lines  and  Methods  of  Car- 
riage by  Land  and  by  Water,  70-0 ;  The  Income  Accounts, 
Financial  Condition,  and  Results  of  Operation  of  the 
New  York,  New  Haven,  and  Hartford  and  Boston  and 
Maine  Railroads,  by  Stephen  Little  and  Josiah  F.  Hill, 
91-225. 

Masslich,  C.  B.    Financing  a  New  Corporate  Enterprise,  Illinois 
Law  Review.     Chicago,  1910:  v.  70-86. 

Mavob,      James.    Transportation.     Johnson.     Modern      Business. 
N.  Y.,   1910:  ii,  354-460. 

Meade,   Edward   Sherwood.     Corporation   Finance.     N.   Y.,   1910. 
468  pp. 

The    Great    American    Railway    Systems,     Railway    World. 

Philadelphia,  1903-6:  xlvii-xlix. 

Wabash,  xlvii,  1327-8,  1355-7;  Reading,  13^3-5; 
Anthracite  Coal  Roads.  1411-3;  Lehigh  Valley, 
1467-8;  New  York  Central,  xlviii,  147  9.  175-6; 
Pennsylvania,  20.3-4,  231-2,  257-9;  Illinois  Central, 
433-5.  463-4;  Missouri  Pacific,  491-3;  Atchison.  687-8, 
723-4;  Baltimore  and  Ohio.  843-5,  871-2;  Chicago,  Bur- 
lington, and  Quincy,  899-900 ;  Chicago  and  North  Western, 
98.3-4;  Great  Northern,  1011-2,  1039-41;  Chicago,  Mil- 
waukee, and  St.  Paul,  109.5-6 ;  Chesapeake  and  Ohio, 
1207-9;  Southern,  1235-6,  1263-4;  Norfolk  and  Western, 
1291-2;  Southern  Pacific,  1487-9,  xlix,  7-8;  Chicago,  Rock 
Island,  and  Pacific,  27-8,  47-8;  Louisville  and  Nashville- 
Atlantic  Coast  Line,  171-2,  195-6;  Boston  and  Maine, 
215-6;  New  York,  New  Haven,  and  Hartford,  235-6; 
Chicago  and  Alton,  356-8;  Northern  Pacific,  397-9,  417-8; 
Pere  Marquette-Cincinnati,  Hamilton,  and  Dayton,  437-8; 
Missouri,  Kansas,  and  Texas,  61.5-7;  Union  Pacific,  635-6; 
Chicago  Great  Western,  675-6;  Erie,  695-7;  Seaboard 
Air  Line,  895-7. 

398 


BIBLIOGRAPHY 

Reorganization   of   Bankrupt   Corporations,   Railway   World. 

Philadelphia,  1903:  xlvii.  1101-2. 

The  Reorganization  of  Railroads,  American  Academy  of  Po- 
litical and  Social  Science,  Annals.  Philadelphia,  1901 : 
xvii,  205-43. 

Trust  Finance.     N.  Y.,  1903.     387  pp. 

The  Work  of  the  Promoter,  American  Academy  of  Political 

and    Social    Science,    Annals.      Philadelphia,    1902:    xx, 
559-70. 

Means,  David  MacGregor.  Protection  of  Minority  Stockholders, 
Anon.  Nation.     N.  Y.,  1902;  Ixxv,  24-5. 

The  Security  of  Railroad  Mortgages,  i\nou.     Nation.     N.  Y., 

1899:  Ixix,  5-0. 

Meaky,  John  P.  A  Decade  of  American  Railroads,  Independent. 
N.  Y.,  1891:   xliii,  1305-8. 

Phases  of  Southern  Railroad  Development,  1881-1901,  Manu- 
facturers' Record's  Twentieth  Anniversary  Supplement. 
Baltimore,  Feb.  20,  1902:  31-3. 

A  Study  in  Railway  Statistics,  Anon.     Introduction  to  Poor's 

Manual  of  the  Railroads  of  the  United  States.     N.   Y., 
1900;  pp.  xvii-cvi. 

Medbery,  J.  K.  Our  Pacific  Railroads,  Atlantic  Monthly.  Bos- 
ton, 18G7:  XX,  704-15. 

Merchants'  Magazine  and  Commercial  Review.  N.  Y.,  1839-70. 
Monthly.     Editor  :  Freeman  Hunt. 

"Hunt's"  in  title  page  1850-GO,  volumes  23  to  43.  Con- 
tinued as  "Commercial  and  Financial  Chronicle,  and 
Hunt's  Merchants'  Magazine." 

Metcalfe,  Lyne  S.,  Jr.  Priority  over  Mortgage  of  Debts  Con- 
tracted by  Railroads  Before  Receiverships,  Central  Law 
Journal.     St.  Louis,  1894:  xxxix,  241-4. 

Meyer,  Balthasar  Henry.  A  History  of  the  Northern  Securities 
Case.  Madison,  190G.  215-349  pp.  University  of  Wis- 
consin, Bulletin,  Economics  and  Political  Science  series, 
i,  215-349. 

' A  History  of  the  Northern  Securities  Case,  Anon.     Railway 

Age.     Chicago,    1904:    xxxvil,   409-12. 

Memorandum  Relating  to  the  Analysis  of  the  Operating  Ex- 
penses of  Railway  Companies,  National  Association  of 
Railway  Commissioners,  Proceedings,  1907.  Washington, 
1907:  103-12. 

Same,  Railway  Age.     Chicago,  1907:   xliv,  578-80. 

399 


RAILROAD  FINANCE 

Methods  of  Railroad  Valuation,  Railway  Critic.     N.  Y.,  1906: 

V,  268-9. 

Michigan.  Board  of  Tax  Commissioners.  Report.  Lansing, 
1901-6. 

Valuation  of  railroads. 

Mickey,  D.  M.  Railroad  Securities,  American  and  English  En- 
cyclopaedia of  Law.  Northport  (N.  Y.),  1892:  xix,  694- 
774. 

Miller,  Edmund  Thornton.  The  Texas  Stock  and  Bond  Law 
and  its  Administration,  Quarterly  Journal  of  Economics. 
Boston,  1907:   xxii,  109-19. 

Minnesota.  Railroad  and  Warehouse  Commission.  Valuation  of 
the  Railways  of  the  State.  Annual  Report.  1908.  Minne- 
apolis, 1909:  12-380. 

Minor,  H.  Dent.  Railroads,  American  and  English  Encyclopaedia 
of  Law.     Northport   (N.   Y.).   1892:   xix,  775-944. 

Mitchell,  Thomas  Warner.  The  Collateral  Trust  Mortgage  in 
Railway  Finance,  Quarterly  Journal  of  Economics.  Bos- 
ton, 1906:  XX,  443-67. 

• ^The  Growth  of  the  Union  Pacific  and  its  Financial  Opera- 
tions, Quarterly  Journal  of  Economics.  Boston,  1907: 
xxi,  569-612. 

Same,  Railroad  Gazette.     N.  Y.,  1907:  xliii,  286-93. 

The    Investments   of   the    Union    Pacific   in   other    Railways, 

Railway   World.     Philadelphia,   1907:   li,   775-9. 

Stockholders'  Profits  from  Privileged  Subscriptions,  Quarterly 

Journal  of  Economics.     Boston,  1905:  xix,  230-69. 

Types  of  Railroad  Mortgages,  Journal  of  Accountancy.    N.  Y., 

1906:  i,  357-71. 

Monthly  Digest  of  Corporation  News.  N.  Y.,  1908—,  Editor: 
George  Hoskiug. 

Moody,  John.  The  Art  of  Wall  Street  Investing.  N.  Y.,  1905. 
167  pp. 

• The  Chesapeake  and  Ohio  Railway  Company,  Moody's  Maga- 
zine.    N.   Y.,   1910:   ix,   165-8. 

The  Future  of  the  Denver  and  Rio  Grande,  Moody's  Maga- 
zine.    N.   Y.,   1910:   ix,  41-5. 

The  Growth  of  the  Harrimau  Lines,  Moody's  Magazine.    N.  Y., 

1906:   ii.  545-9. 

• The  Investor's  Primer.     N.  Y..  1907.     183  pp. 

Moody's    Analysis    of    Railroad    Investments ;    containing   in 

detailed   form   an   expert   comparative   analysis  of   each 
400 


BIBLIOGRAPHY 

of  the   railroad  systems  of  the   United   States.     N.  T., 
1909—.     Annual. 
Preferred  Stocks  as  Investments,  American  Academy  of  Po- 
litical  and   Social   Science,  Annals.     Philadelphia,   1910: 
XXXV,  545-53. 

The   Romance   of   the   Railway,    Moody's    Magazine.     N.    T., 

1908.  v-vi. 

Introductory,  v,  89-9.3;  Reading,  94-104;  Union 
Pacific,  lGO-81;  Pennsylvania,  227-45;  Chicago,  Mil- 
waukee, and  St.  Paul,  291-6;  Erie,  357-75,  427-40; 
Northern  Pacific,  vi,  7-18;  New  York  Central,  73-90; 
Atchison,  145-50;  Baltimore  and  Ohio,  229-45;  Great 
Northern,   327-41;    Southern,  405-16. 

The  Truth  about  the  Trusts ;  a  description  and  analysis  of 

the    American    trust    movement.     N.    Y.,    1904.     514   pp. 
"The  Greater  Railroad  Groups,"  431-50. 

Moody's  Manual  of  Railroads  and  Corporation  Securities.  N.  Y., 
1900 — .     Annual.     Editors :  John  Moody,  George  Hosking. 

MooBE,  Joseph  H.  How  Members  of  Congress  are  Bribed.  An 
open  letter.  A  protest  and  a  petition  from  a  citizen 
of  California  to  the  United  States  congress.  San  Fran- 
cisco, n.d.     22  pp. 

MoBAWETZ,  Victor.  The  Anti-trust  Act  and  the  Merger  Case, 
Harvard  Law   Review.     Cambridge,   1904 :   xvii,  533-42. 

A   Treatise   on    the    Law   of    Private   Corporations.      Boston 

(2  ed.),  188G.     2  v. 

Morgan,  Appleton.  The  People  and  the  Railways.  A  popular 
discussion  of  the  railway  problem  in  the  United  States. 
N.  Y.,   1888.     245  pp. 

Morgan,  Richard.  Overcapitalization  of  American  Railroads  a 
Financial  Question,  American  Banker.  Chicago,  1900 : 
v,  335-9. 

Morris,    Ray.     Railroad   Administration.      N.    Y.,    1910.    309   pp. 

Mott,  Edward  Harold.  Between  the  Ocean  and  the  Lakes.  The 
story  of  Erie.     N.   Y.,  1901.     511  pp. 

Mott,  II.  S.  Uniform  Railroad  Accounting,  Harper's  Weekly. 
N.  Y.,  1908:  lii,  9. 

Mulleb,  Jean  Paul.  Steam  Roads  during  Organization  and 
Under  Construction,  Government  Accountant.  Washing- 
ton, 1910:  iv,  59-G3,  127-34.  168-72,  215-8,  259-65. 

Theoretical    Movement  of  Package  Freight,  Government  Ac- 
countant.    Washington,   1911 :  iv,  392-4. 
27  401 


RAILROAD  FINANCE 

MuNDY,  Floyd  Woodruff.  Railroad  Bonds  as  an  Investment  Se- 
curity, American  Academy  of  Political  and  Social  Sci- 
ence,  Annals.     Philadelphia,   1907:   xxx,   312-35. 

(compiler).  The  Earning  Power  of  Railroads;  mileage,  cap- 
italization, bonded  indebtedness,  earnings,  operating  ex- 
penses, cost  of  maintenance,  fixed  charges,  comparative 
statistics,  investments,  dividends,  guarantees,  etc.  N.  Y., 
1902—.     Annual. 

MuNSELL,  Joel.  The  Origin,  Pi-ogress,  and  Vicissitudes  of  the 
Mohawk  and  Hudson  Railroad,  and  the  First  Excursion 
on  it.     Albany,  1875.     20  pp. 

Myebs,  Gustavus.  Great  Fortunes  from  the  Railroads.  His- 
tory of  the  Great  American  Fortunes.  Chicago,  1909-10: 
ii-iii. 

Myebs,  John  C.  Winding  up  and  Reorganization  of  Corpora- 
tions, American  and  English  Encyclopaedia  of  Law. 
Northport   (N.  Y.)    (2  ed.,),  1905:   xxx,  819-89. 

National  Association  of  Railway  Commissioners.  Proceedings, 
Washington,  1889 — .     Annual. 

Nay,  Frank.  Capitalization  of  Railways,  Government  Account- 
ant.    Washington,  1911:  iv,  467-78,  v,  15-23. 

Duties  of  a  Comptroller  or  Chief  Accounting  Officer.     Dew- 

snup,  Railway  Organization  and  Working.    Chicago,  1906 : 
264-94. 

Nelson,  S.  A.  (compiler).  The  Bond  Buyers'  Dictionary.  N.  Y., 
1907.     174  pp. 

Newcomb,  Harry  Turner.  The  Anatomy  of  a  Great  Railway 
System,  Yale  Review.     New   Haven,   1905:  xiii,  347-79. 

The  Concentration   of   Railway   Control,   American   Academy 

of   Political   and    Social    Science,   Annals.      Philadelphia, 
1902:    xix,    89-107. 

Railway  Capitalization,  Railway  World.     Philadelphia,  1907: 

li,  472-6. 

Railway   Combination   and   the    Small    Investor,    Booklovers' 

Magazine.     Philadelphia,  1903:  i.  397-402. 

Railway    Economics.     Philadelphia,    1898.     152    pp. 

The  Recent  Great  Railway  Combinations,  Review  of  Reviews. 

N.  Y.,  1901:  xxiv,  163-74. 

Newhall,  D.  S.  The  Care  and  Distribution  of  Supplies.  Phila- 
delphia, 1905.  8  pp.  P.  R.  R.  Y.  M.  C.  A.,  Railway 
Transportation ;   a   Course  of  Lectures. 

. Purchasing  Supplies.     Philadelphia,  1905.     10  pp.     P.  R.  R 

402 


BIBLIOGRAPHY 

T.  M.  C.  A.,  Railway  Transportation ;  a  Course  of  Lec- 
tures. 

Nicholas,  Henry  C.  Who  Owns  Our  Railroads?  Public  Opin- 
ion.    N.  Y.,  1905:  xxxviii,  317-22. 

NoYES,  Alexander  Dana.  Finance,  Forum.  N.  Y.,  1902-8:  xxxiv- 
xl.     Quarterly. 

The    Future   of    High    Finance,    Atlantic    Monthly.      Boston, 

1910:  cv,  229-39. 

NoYES,  Walter  Chadwick.  A  Treatise  on  the  Law  of  Inter- 
corporate Relations.     Boston    (2  ed.),   1909.     924  pp. 

Obeeholtzer,  Ellis  Paxson.  Jay  Cooke  after  the  Civil  War, 
Century  Magazine.     N.  Y.,  1907:  Ixxiii,  779-93,  855-69. 

Jay  Cooke,  Financier  of  the  Civil  War.     Philadelphia,  1907. 

2  V. 

Northern  Pacific. 

Old  Colony  Railroad  Company.  Report  of  the  Committee  for 
Investigating  the  Affairs  of  the  Old  Colony  Railroad. 
Boston,  1850.     165  pp. 

Ontario.      Commission   on    Railway   Taxation.     Report   on    Rail- 
way Taxation,  1905.     Toronto,  1905.     219  pp. 
Valuation  of  railroads. 

Oyens,  H.  J.  Amerikaansche  Spoorwegwaarden  voor  Neder- 
landsche  Kapitalisten.     Amsterdam,   1870.     30  pp. 

Palmer,  Frederick.  Harriman  at  Close  Range,  Collier's  Weekly 
N.   Y.,   March  2,   1907. 

Patterson.  Christopher  Stuart.  Railway  Receivers,  Weekly 
Notes  of  Cases   (Pa.).     Philadelphia.  1884:  xiv,  521-4. 

Payne,  Will.  The  Cheat  of  Over-capitalization,  Everybody's 
Magazine.     N.  Y.,  1907:  xvii,  17-23. 

The  Rise  of  Harriman,  Saturday  Evening  Post.  Philadel- 
phia. December  8  and  22,  1906,  January  5  and  26,  1907. 

Peabody,  James.  Vitalized  Statistics.  Dewsnup,  Railway  Or- 
ganization and  Working.     Chicago,  1906:  367-84. 

Pennsylvania  Company.  Corporate  History  of  the  Pittsburgh, 
Fort  Wayne,  and  Chicago  Railway  Company.  Pittsburgh, 
1875.    485  pp. 

Pennsylvania  Railroad  Company.  Fiftieth  Anniversary  of  the 
Incorporation  of  the  Pennsylvania  Railroad  Company, 
held  in  Philadelphia,  April  13th,  1896.  Philadelphia, 
189().     79  pp. 

Report  of  the  Investigating  Committee  of  the  Pennsylvania 

Railroad   Company.     Philadelphia,    1874.     240  pp. 
403 


RAILROAD  FINANCE 

Phillips,  Ulbich  Bonnell.  A  History  of  Transportation  in  the 
Eastern  Cotton  Belt  to  1860.     N.  Y.,  1908.     405  pp. 

The  Building  of  the  Charleston  and  Hamburg.  132-67; 
The  Charleston  and  Cincinnati  Project  and  the  Reorganized 
South  Carolina  Railroad,  168-220;  The  Georgia  Railroad 
and  Banking  Company,  221-251 ;  The  Control  of  Georgia 
Railroad  System,  252-302;  The  Western  and  Atlantic: 
a  State  Owned  Railroad,  302-34. 

Pierce,  Edward  Lillie.  A  Treatise  on  the  Law  of  Railroads. 
Boston,  1881.     575  pp. 

PiK,  J.  Die  Amerikaansche  Spoorwegaarden.  Groningen,  1879. 
180  pp. 

Plant,  A.  H.  Railway  Accounting  and  the  Preparation  of  Young 
Men  for  the  Accounting  Profession,  Government  Ac- 
countant.    Washington,   1910 :   iv,  5-24. 

• On  the  Question  of  Bookkeeping,  International  Railway  Con- 
gress, Bulletin.     Brussels,  1905 :  xix,  701-95. 

PoE,  Orlando  Metcalfe.  History  and  Construction  of  Trans- 
continental Railways  in  the  United  States.  Report  of 
the  Secretary  of  War,  1883 :  1,  253-317.  U.  S.  document ; 
serial  2182. 

PooB,  Henry  Varnum.  History  of  the  Railroads  and  Canals 
of  the  United  States.     N.  Y.,  1860.    612  pp. 

The  Pacific  Railroads,  North  American  Review.     N.  Y.,  1879: 

cxxviii,  664-80. 

Poor's  Handbook  of  Investors'  Holdings.     N.  Y.,  1908 — .     Annual. 

Poor's  Manual  of  the  Railroads  of  the  United  States.  N.  Y., 
1868 — .  Annual.  Editors:  Henry  Varnum  Poor,  Henry 
William  Poor,  John  P.  Meany. 

Potter,  Platt.  Treatise  on  the  Law  of  Corporations.  N.  Y., 
1879.     2  V. 

Potts,  Charles  S.  Railroad  Transportation  in  Texas.  Austin, 
1909.  214  pp.  University  of  Texas,  Bulletin  119,  Hu- 
manistic series  7. 

PoussiN,  GuiLLAUME  TELL,  Chemins  de  fer  americans ;  his- 
torique  de  leur  construction,  prix  de  revint  et  de  pro- 
duit ;  mode  d'administration  adopto ;  resume  de  la  legis- 
lation qui  les  regit.     Paris,  1836.     271  pp. 

Same,     Amerikanische    Eisenbahnen ;     Geschichtliches     ihrer 

Ausfiihrung,  Baukosten,  Ertrag,  Verwaltung,  und  Gesetz- 
gebung  derselben.     Regensburg,  1837.     408  pp. 

Powell,  T.  W.   (editor).    The  Reading  Railroad;  the  history  of 

404 


BIBLIOGRAPHY 

a  great  trunk  line.  An  illustrated  description  of  the 
road's  resources  and  connections.  Portraits  and  bio- 
graphical sketches  of  the  principal  officials.  Points  of 
interest   along  the  system.     Philadelphia,   1892.     287  pp. 

Pratt,  Edwin  A.     American  Railways.     London,  1903.     309  pp. 

Peendergast,  F.  E.  Transcontinental  Railways,  Harper's  Maga- 
zine.    N.  Y.,  1883:  Ixvii,  936-44. 

Pbiestly,  Neville.  Report  on  the  Organization  and  Working 
of  Railways  in  America.     London,  1904.     128  pp. 

Pbossek.  William  Thornton.  A  New  Transcontinental  Railway, 
Pacific  Monthly.  Portland  (Or.),  1910:  xxiii,  209-15. 
Chicago,  Milwaukee,  and  Puget  Sound. 

Pbout,  Henry  Goslee.  Railroad  Construction  and  Equipment. 
Sbaler.  The  United  States  of  America.  N.  Y.,  1894: 
ii,  1(5.3-78. 

Purdue  University.  Lectures  delivered  before  the  students  in 
railway  engineering  and  allied  subjects.  [James  H. 
Smart,  editor.]     Lafayette,  1S98.    347  pp. 

PuRDY,  James  Hart.  A  Treatise  on  the  Law  of  Private  Corpora- 
tions, also  of  Joint  Stock  Companies  and  Other  Unin- 
corporated As.sociations.  Enlargement,  revision,  and  re- 
construction of  "Beach  on  Private  Corporations."  Chi- 
cago, 1905.     3  V. 

Railroad  Gazette.  New  York,  185G-1908.  Weekly.  Editors: 
S.  Wright  Dunning.  Matthias  Nace  Forney,  Henry  Goslee 
Prout.  William  Henry  Boardman. 

Railroad  Record.  Cincinnati,  1853-G3-f?  Weekly.  Editors: 
E.  D.  Marshall,  W.  Wrightman,  J.  A.  James. 

The  Railway  Age.  Chicago,  1876-1908,  Weekly.  Editors:  E.  H. 
Talbott,  H.  R  Talbott,  Harry  P.  Robinson,  Hugh  M. 
Wilson. 

Railway  Age  Gazette.  N.  Y.,  1908—.  Weekly.  Editors :  William 
Henry  Boardman,  Samuel  O.  Dunn. 

The  Railway  and  Corporation  Law  Journal.  N.  Y.,  188T''^ll2. 
Weekly.  Editors :  Charles  Fisk  Beach,  Jr.,  William  Wil- 
son  Cook,    Wayland   E.    Benjamin,    Stewart   Rapalje. 

The  Railway  Chronicle.  Boston,  1873-|-?  Weekly.  Editor:  J.  B. 
Whitney. 

Railway  Critic.     N.  Y.,  1902—.     Monthly. 

The   Railway   Era.     Cleveland.    1899+?     Monthly. 

The  Railway  Magazine.     BufiCalo,  1885-|-?     McntWy 

The  Railway  Monitor.     N.  Y.,  1873-5.     Weekly. 

405 


RAILROAD  FINANCE 

The  Railway  Register.     St.  Louis,  1887+ ? 

The  Railway  Reporter.     Pittsburgh,  1880-4+ ?    Weekly. 

Railway  Review.  Chicago,  1868-98.  Weekly.  Editor:  Willard  A. 
Smith. 

Begun  as  "Chicago  Railway  Review" ;  changed  1898  to 
"Railway  and  Engineering  Review." 

The  Railway  Times.  Boston,  1849-67.  Weekly.  Editor:  John 
A.  Haven. 

Railway  World.  Philadelphia,  1856 — .  Weekly.  Editors  :  Thomas 
Sargent  Fernon,  John  Luther  Ringwalt,  J.  Peter  Lesley, 
J.  D.  Slade,  Harry  Turner  Newcomb,  Frank  Julian 
Warne,  Frank  D.  McLain,  Edward  G.  Ward. 

Begun  as  "Pennsylvania  Railroad  and  Mining  Regis- 
ter" ;  changed  to  "U.  S.  Railroad  and  Mining  Register"  in 
1856,  and  to  present  title  in  1875. 

Randolph,  Cabman  Fitz.  Considerations  on  the  State  Corpora- 
tion in  Federal  and  Interstate  Relations ;  the  Northern 
Securities  cases,  Columbia  Law  Review.  N.  Y.,  1903 : 
iii,   168-97,  221-40,  305-29. 

The  Northern   Securities  Decision,   North  American   Review. 

N.  Y.,  1903:  clxxvi,  846-55. 

Rankin,  George  A.  An  American  Transportation  System.  N.  Y., 
1909.     464  pp. 

Rawle,  Francis.  Car  Trust  Securities,  American  Bar  Associa- 
tion, Report.     Philadelphia,  1885:  viii,  277-322. 

(compiler).     Acts  Relating  to  Car  Trusts  in  Force  in  Various 

States  down  to  March  1,  1893.    Philadelphia,  1893.    50  pp. 

Redfield,  Isaac  Fletcher.  The  Law  of  Railways.  Edited  by 
J.  and  K.  Kinney.     Boston   (6  ed.),  1888.     2  v. 

Reid,  William  A.  A  Treatise  on  the  Law  Pertaining  to  Cor- 
porate Finance  Including  the  Financial  Operations  and 
Arrangements  of  Public  and  Private  Corporations.  Al- 
bany, 1896.     2  V. 

Reizenstein,  Milton.  The  Economic  History  of  the  Baltimore 
and  Ohio  Railroad,  1827-1853.  Baltimore,  1897.  89  pp. 
Johns  Hopkins  Univei'sity,  Studies  in  Histoiical  and  Po- 
etical Science,  xv,  275-363. 

Remsen,  Daniel  S.  The  Security  of  Railway  Invest:iionts,  New 
York  State  Bar  Association,  Report.  Albany,  1^8s>;  xii, 
110-21. 

Rhodes,  jAiiSi  Fobd.    History  of  the  United  States.    N.  Y.,  i<«»6 : 

406 


BIBLIOGRAPHY 

"The  Credit  Mobilier,"  1-19. 

Rice,  Isaac  Leopold.  Legalized  Plunder  of  Railroad  Properties; 
the  Remedy,  Forum.     N.  Y.,  1894:  xvii,  676-89. 

RiEBENACK,  Maximilian.  The  Accounting  Department  of  the 
Pennsylvania  Railroad  Company,  Railway  World.  Phila- 
delphia, 1901-2:  xlv,  1367-9,  1396-7,  1423-5,  1453-5,  xlvi, 
4-6,  31. 

General    Accounting.     Philadelphia,    1906.     7    pp.     P.    R.    R. 

Y.  M.  C.  A.,  Railway  Transportation;  a  Course  of  Lec- 
tures. 

RiNGWALT,  John  Luther.  Development  of  Transportation  Sys- 
tems in  the  United  States.  Philadelphia,  1888.  398 
pp. 

Ripley,  Edward  Payson.    How  Consolidation  has  Worked  out  in 
the  Case  of  One  of  the  Great  Common  Carriers.    Chicago 
Conference  on  Trusts.     Chicago,   1900:   552-5. 
Atchison. 

Ripley,  William  Zebina.  The  Capitalization  of  Public  Service 
Corporations.  Ripley,  Trusts,  Pools  and  Corporations. 
Boston,  1905:  121-48.  From  Quarterly  Journal  of  Eco- 
nomics.    Boston,  1901:  xv,  106-37. 

• The  Course  of  Railway  Security  Prices,  Railway  Age  Ga- 
zette.    N.  Y.,  1911 :  1,  695-700. 

Foreign  Capital  in  American  Railways,  Railway  Age  Ga- 
zette.    N.  Y.,  1911:  li,  883-4. 

Railway   Capital   and   Capitalization,    Railway   Age   Gazette. 

N.  Y.,  1910:  xlix,  732-4,  778-82. 

Railway    Capital :    bonds   vs.    stocks.    Railway    Age   Gazette. 

N.  Y.,  1911:   li,  1098-1100. 

Railway  Share  Capital,  Railway  Age  Gazette.     N.  Y.,  1911 : 

li,  1064-6. 

Railway  Speculation,  Quarterly  Journal  of  Economics.  Bos- 
ton,   1911:   XXV,   185-215. 

Stock   Watering,   Political    Science   Quarterly.     N.   Y.,   1911: 

xxvi,  98-121. 

(editor).     Railway   Problems.     Boston,    1907.     686   pp. 

A  Chapter  of  Erie,  by  Charles  Francis  Adams,  Jr.,  1-61 ; 
The  Building  and  Cost  of  the  Union  Pacific,  by  Henry 
Kirke  White,  78-97 ;  The  Northern  Securities  Company, 
by  Balthasar  Henry  Meyer,  517-30. 

Robinson,  John  R.    The  Octopus.    A  history  of  the  construction, 
conspiracies,  extortions,  robberies,  and  villainous  acts  of 
407 


RAILROAD  FINANCE 

the  Central  Pacific,  Southern  Pacific  of  Kentucky,  Union 
Pacific,  and  other  subsidized  railroads.  San  Francisco, 
1894.     116  pp. 

Robinson,  Maurice  Heney.  The  Holding  Corporation,  Yale  Re- 
view.    New  Haven,  1910:  xviii,  390-412,  xix,  13-31. 

The  Legal  Economic  and  Accounting  Principles  Involved  in 

the  Judicial  Determination  of  Railway  Passenger  Rates, 
Yale  Review.     New  Haven,  1908:  xvi,  355-99. 

Same,  Railway  Age  Gazette.     N.  Y.,  1908 :  xlv,  1106-8,  1143-9, 

1205-6,   1252-4. 

Railway  Freight  Rates :  the  Legal,  Economic,  and  Account- 
ing Principles  Involved  In  Their  Judicial  Inter- 
pretation, Yale  Review.  New  Haven,  1909:  xxviii, 
122-53. 

Rollins,  Montgomery.  Convertible  Bonds  and  Stocks,  American 
Academy  of  Political  and  Social  Science,  Annals.  Phila- 
delphia, 1910:  XXXV,  579-92. 

Money  and  Investments.     Boston,  1907.     436  pp. 

RoRER,  DA^^D.  A  Treatise  on  the  Law  of  Railways.  Chicago, 
1884.     2  V. 

Ryan,  John  A.  Is  Stock  Watering  Immoral?  International 
Journal  of  Ethics.     Philadelphia,   1908:  xviii,  151-67. 

Saby,  Rasmus  S.  Early  Railroad  Legislatioa  in  Minnesota, 
Minnesota  Academy  of  Social  Sciences,  Publications. 
1908.     Northfield    (Minn.),  1909:  ii,  127-66. 

Sakolsky,  Aaron  M.  Control  of  Railroad  Accounts  in  Leading 
European  Countries,  Quarterly  Journal  of  Economics. 
Boston,  1910:  xxiv,  471-98. 

Sampson,  George  T.  Railroad  Organization.  La  Follette,  The 
Making  of  America.  Philadelphia,  1906 :  iv,  367-83.  From 
Association  of  Engineering  Societies,  Journal.  Philadel- 
phia, 1902:  xxvii,  1-31. 

Santilhano,  J.  D.  Amerikaansche  Spoorwegen.  Rotterdam, 
1884.     610  pp. 

Sargent,  J.  H.  History  of  Railroads  between  Cleveland  and 
Chicago,  Association  of  Engineering  Societies,  Journal. 
N.  Y.,  1887:  vi.  355-03. 

Savage,  Chakles  Chauncey.  Priority  of  Claims  for  Labor  and 
Materials  over  Lien  of  Railroad  Mortgage,  Central  Law 
Journal.     St.   Louis,  1885:  xxi,  125-9. 

Sedgwick,  Arthur  George.     Railroad  Improvements,  Anon.    Na- 
tion.    N.  Y.,  1898:  Ixvii,  25-6. 
408 


BIBLIOGRAFHY 

Railroad  Stock  and   Stockholders,   Anon.    Atlantic   Monthly, 

Boston,  1873:  xxxii,  7<54-8. 

Report  of  the  Erie  Investigating  Committee,  Anon.     Atlantic 

Monthly.     Boston,   1873:  xxxii,  124-7. 

Seliqman,  Isaac  Newton.  Underwriting  the  Sale  of  Corporate 
Securities,  Journal  of  Accountancy.  N.  Y.,  1906:  ii, 
321-30. 

Sebbell,  Lemuel  William.  The  Railroad  Situation  in  the  United 
States.     N.  Y.,  1907.     42  pp. 

Seymour,  George  F.  Railway  Consolidation  in  New  England, 
New  England  Magazine.  Boston,  1896  (n.s.),  xiv 
251-3. 

Seymour,  George  R.  The  New  System  of  Railroad  Accounting, 
Van  Norden  Magazine.     N.  Y.,  1908 :  ii,  no.  xii,  91-5. 

Shelden,  Lionel  Allen.  The  Railroad  Problem.  Arena.  Bos- 
ton, 1892:  V,  297-306. 

Shinn,  William  P.  On  Railroad  Accounts  and  Returns  (with 
discussion),  American  Society  of  Civil  Engineers,  Trans- 
actions.    N.  Y.,  1876:  v,  215-8,  330-40. 

Short,  Edward  Lyman.  The  Law  of  Railway  Bonds  and  Mort- 
gages.    Boston,  1897.     975  pp. 

Singer,  J.  Die  Amerikanischen  Bahnen  und  ihre  Bedentung 
fiir  die  Wellwirtschaft.     Berlin,  1909.     199  pp. 

Sipes,  William  B.  The  Pennsylvania  Railroad,  its  origin,  con- 
struction, condition,  and  connections.  Philadelphia,  1875. 
281  pp. 

Sloan,  Harry  M.  The  Auditor  of  Expenditures.  Dewsnup, 
Railway  Organization  and  Working.  Chicago,  1906: 
295-334. 

Smalley,  Eugene  V.  History  of  the  Northern  Pacific  Railroad. 
N.  Y.,  1883.     437  pp. 

That  part  of  the  book  dealing  with  the  Villard  adminis- 
tration was  dictated  by  Henry  Villard. 

Smith,  George  H.  The  Pacific  Railroad  Companies  and  the  Peo- 
ple of  the  Trans-Mississippi  States,  American  Law.  Re- 
view.    St.  Louis,  1895:  xxix,  189-208. 

Smith,  Howard  Irving.  Smith's  Financial  Dictionary.  N.  Y., 
1903.     .543  pp. 

Smith,  .Tohn  Wilson.  The  Law  of  Receiverships.  Rochester, 
1897.     805  pp. 

Smith,  Milton  H.     The  Louisville  and  Nashville  Railroad  Com- 
pany.    Fiftieth  Anniversary  of  the  Service  of  James  Ged- 
409 


RAILROAD  FINANCE 

des  with  the  Louisville  and  Nashville  Railroad  Company. 
Louisville.  1901.     12-41. 

Smith,  Roy.  State  Supervision  over  Accounting  Methods ;  Super- 
vision over  the  Accounting  of  Railroad  Corporations, 
Journal  of  Accountancy.     N.  Y.,  1909:  viii,  250-8. 

Smith,  William  Prescott.  The  Book  of  the  Great  Railway 
Celebrations  of  1857,  embracing  a  full  account  of  the 
opening  of  the  Ohio  and  Mississippi,  and  the  Marietta 
and  Cincinnati  railroads,  and  the  Northwestern  Vir- 
ginia branch  of  the  B.  &  O.  R.  R.,  with  the  histories 
and  descriptions  of  the  same.  N.  Y.,  1858.  264-fl78 
pp. 

' A   History   and   Description   of   the   B.   &   O.    R.    R.,   Anon. 

Baltimore,  1853.     200  pp. 

Smythe,  Roland  Mulville  (compiler).  Obsolete  American  Se- 
curities and  Corporations,  illustrated  with  photographs 
of  important   repudiated   bonds.     N.   Y.,   1904.    979  pp. 

Snyder,  Carl.  American  Railways  as  Investments.  A  detailed 
and  comparative  analysis  of  all  the  leading  railways, 
from  the  investor's  point  of  view ;  with  an  introductory 
chapter  on  the  methods  of  estimating  railway  values. 
N.  Y.,  1907.     762  pp. 

Harriman,  "Colossus  of  Roads,"  Review  of  Reviews.     N.  Y., 

1907:  XXV,  37-48. 

Railroad  Over-capitalization,  the  real  evil  is  to  the  rail- 
road itself.  Journal  of  Accountancy.  N.  Y.,  1907;  iv, 
332-6. 

Railway  Reports  and  the  New  Rate  Law,  Moody's  Magazine. 

N.  Y.,  1906:  iii,  72-9. 

Railroad  Stocks  as  Investments,  American  Academy  of  Po- 
litical and  Social  Science,  Annals.  Philadelphia,  1910: 
XXXV,  646-56. 

Snyder,  William  Lamartine.  '  Railway  Over-capitalization,  Out- 
look.    N.  Y.,  1907:  Ixxxv,  312-6. 

Railway    Over-capitalization :    the    case    against    the    Great 

Northern,  Outlook.     N.  Y.,  1907 :  Ixxxv.  599-602. 

South  Dakota.  Board  of  Railroad  Commissioners.  South  Dakota 
Railroad  Appraisal  Act  of  June  30,  1909.  Report  of 
Carl  C.  Witt,  engineer.     [Sioux  Falls.  1911.]     12  pp. 

Speare,  Charles  F.  Making  a  Railway  Report,  Railway  Age 
Gazette.     N.  Y.,  1910:  xlviii,  395-6. 

Selling  American   Bonds   in   Europe,   American   Academy  of 

410 


BIBLIOGRAPHY 

Political  and  Social  Science,  Annals.     Philadelphia,  1907: 
XXX,  269-83. 

Speabman,  Frank  Hamilton.    Building  up  a  Great  Railway  Sys- 
tem, Outlook.  N.  Y.,  1909:  xci,  435-52. 
Union  Pacific. 

— — The  First  Transcontinental  Railroad,  Harper's  Magazine. 
N.  Y.,  1904:  cix,  711-20. 

Rebuilding  a   Great   Railroad,    World's   Work.     N.   Y.,   1904: 

viii,  5371-7. 

The    Strategy    of    Great    Railroads.      N.    Y.,    1903.      287    pp. 

Vanderbilt  Lines,  1-19 ;  Pennsylvania,  21-46 ;  Harriman 
Lines,  47-08 ;  Hill  Lines,  69-89 ;  The  Fight  for  Pittsburgh, 
91-111 ;  Gould  Lines,  133-54 ;  Atchison,  155-73 ;  Chicago, 
Milwaukee,  and  St.  Paul,  175-94;  Chicago  and  North 
Western,  195-212 ;  The  Rebuilding  of  an  American  Rail- 
road, 213-34;  The  First  Trajiscontinental  RailiHoad, 
235-02. 

Spelling,  T.  C^vkl.  A  Treatise  on  the  Law  of  Private  Corpora- 
tions.    N.  Y.,   1892.     2  V. 

Spencer,  Arthur  M.  The  Prevention  of  Stock-watering  by  Pub- 
lic Service  Corporations,  Journal  of  Political  Economy. 
Chicago,    1900:    xiv,    542-52. 

Springer,  William  Mckendkie.  Watered  Stock.  Springfield 
(111.),   1874.     9  pp. 

The  Standard  Financial  Quarterly.  N.  Y.,  1910 — .  Editor:  An- 
drew W.  Ralston. 

Stanford,  Leland.  Pacific  Railroads.  Statement  made  before 
the  senate  select  committee  on  Pacific  railroads.  [March 
17,  1888.]     n.p.,  n.d.     28  pp. 

Stanton,  J.  C.  Statement  of  the  Building  of  the  Alabama  and 
Chattanooga    Railroad.     Chattanooga,   1878.     24   pp. 

The  Statist.     London,  1878 — .     Weekly.     Editor:  George  Paish. 

Stennett,  W.  H.  Yesterday  and  To-day.  A  history  of  the  Chi- 
cago and  North  Western  railway  system.  Anon.  Chicago, 
1905.     124  pp. 

Sterne,  Simon.  Closing  Argument  on  Behalf  of  the  Chamber  of 
Commerce  and  Board  of  Trade  and  Transportation  of 
New  York,  delivered  on  December  2  and  3,  1879.  before 
the  special  assembly  [Hepburn]  committee  on  railroads. 
New  York,  Proceedings  of  the  special  committee  on  rail- 
roads.    N.  Y.,  1879:   iv,  3881-4036. 

History  and   Political   Economy   of  Railways,   Lalor,  Cycle- 

411 


RAILROAD  FINANCE 

psedia  of  Political  Science,  Political  Economy,  and  of 
the  Political  History  of  the  United  States.  Chicago, 
1884:  iii,  493-512. 

■ Legislation  Concerning,  and  Management  of  Railways  in  the 

United  States,  Lalor,  Cyclopa>dia  of  Political  Science, 
Political  Economy  and  of  the  Political  History  of  the 
United  States.     Chicago,  1884:  iii,  512-31. 

The  Railway   Problem,   National   Quarterly   Review.     N.   Y., 

1880:  xl,  395-428. 

The  Railway  Problem  in  the  State  of  New  York.     Opening 

statement  before  the  assembly  special  [Hepburn]  com- 
mittee on  railroads.  New  York,  Proceedings  of  the  spe- 
cial   committee   on   railroads.      N.    Y.,    1879 :    i,   98-118. 

■ The  Railway  Question ;  statement  made  to  the  United  States 

senate  select  committee  on  interstate  commerce.  Wash- 
ington, 1885.     39  pp. 

Railway    Reorganization,   Forum.     N.   Y.,    1880:    x,   37-53. 

Recent  Railroad  Failures  and  Their  Lessons,  Forum.     N.  Y., 

1894:   xvii,  19-38. 

Stevenson,  Geobge.  Underwriting,  American  Academy  of  Po- 
litical and  Social  Science,  Annals.  Philadelphia,  1905 : 
XXV,  61-6. 

Stickney,  Alpheus  Beede.  Railway  Over-capitalization ;  a  de- 
fense of  the  Great  Northern,  Outlook.  N.  Y.,  1907: 
Ixxxv,  559-62. 

The  Railway  Problem.     St.  Paul,  1891.     249  pp. 

A  Western  Trunkline  Railway  without  a  Mortgage.     A  short 

history  of  the  finances  of  the  Chicago  Great  Western 
railway  company.     N.  Y.,  n.d.     15  pp. 

Stimson,  a.  L.  History  of  the  Express  Companies  and  the  Origin 
of  American  Railroads.     N.  Y.,  1859.     287  pp. 

Stockwell,  Herbert  G.  Depreciation,  Renewal  and  Replacement 
Accounts  (with  discussion),  American  Association  of 
Public  Accountants,  Year-Book,  1909.  N.  Y.,  1910;  192- 
272. 

Stone,  Herbert  Lawrence.  Ten  Years'  Advance  in  Railroading, 
World's  Work.     N.  Y.,  1904:  vii,  4526-31. 

Storey,  Moobfield.  Reorganization  of  Railroads  and  Other  Cor- 
porations, American  Bar  Association,  Report.  Philadel- 
phia,  1896:  xix,  240-52. 

» Same,  American  Law  Review.     St.  Louis,  1896 :  xxx,  801-12. 

Stobk,  Paul.    The  Department  of  Railroad  Accounts  (How  it  is 

412 


BIBLIOGRAPHY 

condTioted  on  different  roads),  Railroad  Gazette.     N.  Y., 
1870:   i.  74-5. 
Stow,    F.    H.    (compiler).     Capitalists'    Guide   and    Railway    An- 
nual:    containing     all     the     railroads     completed     and 
in    progress    in    the    United    States.     N.    T.,    1859.     537 
pp. 
Strattan,  Frederick  A.     The  Central  and  Southern  Pacific  Com- 
panies, Cosmopolitan.     N.  Y.,  1893:  xv,  280-9. 
Strother,  William.     Swinging  the  March  of  Empire  Southwest- 
ward,   World's   Work.     N.   Y.,   190G:   xi,  707.3-81. 
StbucKl^,  Henri.    Voies  de  communication  aux  Etats-Unis ;  etude 

technique  et  administrative.     Paris,  1847.     470  pp. 
Sturgis,  C.  I.     Railway  Depreciation  Accounts,  Railway  Age  Ga- 
zette.    N.  Y.,  1910:  xlviii,  944-7. 
Sumner,   Charles    A.    (and   others).     A    Memorial   Against   Re- 
funding the  Claim  of  the  United  States  upon  the  Central 
Pacific    Railroad    Company    for    $72,000,000.     n.p.,    1894. 
13  pp. 
SuTRO,    Adolph.     The    People    of    Kentucky    Disgraced.     To    the 
people  of  Kentucky,  n.p.,  1894.     4  pp. 
The  Southern  Pacific  Company. 
Swain,  Henry  Huntingdon.     Economic  Aspects  of  Railroad  Re- 
ceiverships,   American    Economic    Association,    Economic 
Studies.     N.  Y..   1898:   iii,  53-161. 
SwANN,    John.     An    Investor's    Notes    on    American    Railroads. 

N.  Y.    (2  ed.),   1887.     224  pp. 
SwABTWouT,    Richard    H.     Railroad    Notes,    Moody's    Magazine. 

N.  Y..  1907:  iii,  423-4. 
Taft,   William    Howard.     Recent   Criticism   of   the   Federal   Ju- 
diciary,   American    Bar    Association,    Report.      Philadel- 
phia, 1895:  xviii,,  237-73. 

Railroad  Receiverships,  258-65. 

Same,    American    Law    Register   and   Review.     Philadelphia, 

1895   (n.s),  xxxiv,  576-610. 

Railroad  Receiverships,  596-602. 
Tait,   J.   Selwin.     The  Fruits  of   Fraudulent   Railroad   Manage- 
ment, Engineering  Magazine.     N.  Y.,  1898:  xi,  407-15. 
Talcott,  Thomas  Mann  Randolph.     Transportation  by  Rail:  an 
anal.ysis  of  the  maintenance  and  operation  of  railroads, 
showing  the  character  and  cost  of  the  service  performed 
by   railway   companies   in  the  maintenance  of  highways 
for   commerce,    and    as   common    carriers   of   passengers, 
413 


RAILROAD  FINANCE 

freight,  and  the  United  States  malls  over  such  highways. 
Richmond  (Va.),  1904.     84  pp. 

Tannee,  Henky  S.  The  American  Traveler ;  a  guide  through 
the  United  States,  containing  brief  notices  of  the  .  .  . 
canals,  and  railroads,  etc.     Philadelphia,  1834.     144  pp. 

A    Brief   Description    of   the   Canals    and    Raih'oads   of   the 

United  States ;  comprehending  notices  of  all  the  most 
important  works  of  internal  improvement  throughout  the 
several   states.     Philadelphia,   1834.     03  pp. 

A   Description   of  the  Canals  and   Railroads  of   the   United 

States ;  comprehending  notices  of  all  the  works  of  in- 
ternal improvements  throughout  the  United  States.  N.  Y., 
1840.    273  pp. 

Memoir  on  the  Recent  Surveys,   Observations,   and   Internal 

Improvements  in  the  United  States.  Philadelphia,  1829. 
108  pp. 

Taylor,  Henry  Osborn.  A  Treatise  on  the  Law  of  Private  Cor- 
porations.    N.  Y.   (5  ed.),  1902.     969  pp. 

Taylor,  William  Dana.  The  Appraisement  of  the  Physical  Value 
of  Wisconsin  Railways  for  the  Purpose  of  Taxation,  Wis- 
consin Engineer.     Madison,  1903 :  viii,  1-10. 

Same,  Condensed,  Engineering  News.     N.  Y.,  1904 :  li,  314-8. 

Wisconsin    Railroad   Valuation,    Wisconsin   Tax   Commission, 

Report,  1905-6.     Madison,  1907:  269-93. 

Taylob,  William  George  Langworthy.  Over-capitalization 
Should  be  Against  the  Rules  of  the  Financial  Game, 
Journal  of  Accountancy.     N.  Y.,  1907:  iv,  336-41. 

Teele,  Arthur  W.  Railroad  Accounting  in  Relation  to  the  20th 
Section  of  the  Act  to  Regulate  Commerce,  Journal  of 
Accountancy.     N.  Y.,  1908:  vii,  89-9.^). 

Tex,  M.  J.  DEN.  Amerikaansche  Spoorwegen  op  de  Amsterdamsche 
Beurs.     Amsterdam,    1873.     98   pp. 

Texas.     Railroad  Commission.     Report.     Austin.  1894. 
Valuation  of  railroads. 

Thomas,  Rowland.  The  Railroads  and  the  Square  Deal,  World's 
Work.     N.  Y.,  1905:  x,  6617-28,  6723-30. 

Thompson,  R.  A.  Method  Used  by  the  Railroad  Commi.ssion  of 
Texas  in  Valuing  Railroad  Property  (with  discussion), 
American  Society  of  Civil  Engineers,  Publications.  N.  Y., 
1904:   lii,  328-64. 

. Railroad  Construction  in  Texas,  Railway  Age  Gazette.    N.  Y., 

1908:  xlv.  562-3. 

414 


BIBLIOGRAPHY 

Regulation  of  the  Issuance  of  Texas  Railroad  Securities  bj 

the  State  Government,  Texas  Academy  of  Sciences, 
Transactions.     Austin,   1902:   v,  1-17. 

Thompson,  Seymour  D.  Commentaries  on  the  Law  of  Private 
Corporations.  Revised  by  Joseph  W.  Thompson.  In- 
dianapolis  (2  ed.),  1908.     G  v. 

Corporations,    Cyclopedia    of    Law    and    Procedure.     N.    Y., 

1894:  X,   1-1363. 

Court  Management  of  Railroads,  American  Law  Review.     St. 

Louis,  1893:  xxvii,  481-97. 

"Foreign"    Receivers    and    Judicial    Assignees,    Green    Bag. 

Boston,  1894:  vi,  118-21. 

Thompson,  Slason.  Cost,  Capitalization,  and  Estimated  Value 
of  American  Railways ;  an  analysis  of  current  fallacies. 
Chicago,  1907.  191  pp. 

Published  by  the  "Bureau  of  Railway  News  of  the  Gen- 
eral Managers'  Association  of  Chicago,"  a  railroad  pub-  , 
licity  organization. 

(editor).     Railway  Statistics  of  the  United  States  of  America 

Compared  with  the  Official  Reports  [of  the  preceding 
year],  and  Recent  Statistics  of  Foreign  Railways.  Chi- 
cago, 190G — .     Annual. 

Thobndike,  John  Larkin.  The  Decision  in  the  "Merger  Case," 
being  a  review  of  the  decision  of  the  United  States 
circuit  court  at  St.  Paul  in  the  case  of  the  United 
States  vs.  Northern  Securities  Co.  Boston,  190G.  36 
pp. 

TiNSLEY,    Lelia    M.    David    II.    Moffat    and    the    Moffat    Road, 
Americana.     N.  Y.,  1910:  v,  435-47. 
Denver,  Northwestern,  and  Pacific. 

TiTTMAN,  Edward  D.  The  Masters  of  our  Railways,  National 
Magazine.     Boston,   1905 :   xxii,  65-82. 

ToMBO,  Carl.  State  Valuation  of  Railways,  Railway  Age.  Chi- 
cago, 1907:  xliv,  348. 

Tbain,  George  Francis.  My  Life  in  Many  States  and  in  For- 
eign Lands.     N.  Y.,  1902.     348  pp. 

Atlantic    and    Great    Western,    237-48;    Union    Pacific. 
283-92. 

TUTTLE,  Lucius.     Statement  Before  the  Railroad  Committee  of 
the    Massachusetts   Legislature   in   Favor   of   an   Act   to 
Authorize   a    Lease  of   the   Fitchburg  R.   R.   Co.   to   the 
Boston  and  Maine  R.  R.     Boston,  1900.     84  pp. 
415 


RAILROAD  FINANCE 

United    States.    Attorney    General.    Annual    reports.    1894-1900. 
Settlement  of  the  Pacific  railroad  debt. 

Union  Pacific  railroad  company,  47  pp.     Records  in  Pacific 

railway  foreclosure  cases,  28-|-57  pp.  Pacific  raili'oads, 
90  pp.     1897.     Serial  3559. 

■ Auditor  of  Railroad  Accounts.     Annual  Report,  1878-80.     In 

annual   report  of  the  secretary   of   the   interior. 

Bureau  of  the   Census.     Commercial   Valuation   of   Railway 

Operating  Property  in  the  United  States :  1904.  By 
Henry  Carter  Adams.     1905.     88  pp.     Bulletin  21. 

Supplement:  Methods  of  Valuation,  by  Balthasar  Henry 
Meyer,  17-21 ;  Rate  of  Capitalization,  by  William  J. 
Meyers,  22-43 ;  Methods  for  the  Distribution  of  Railway 
Values  among  States,  by  Balthasar  Henry  Meyer,  44-52 ; 
Valuation  of  Railways  by  Railway  Men,  by  James  Shir- 
ley Eaton,  53-61 ;  State  Reports  Relative  to  Railway 
Valuation,  62-6 ;  Valuation  of  Railways  in  Foreign  Coun- 
tries, by  Balthasar  Henry  Meyer,  67-75 ;  Railway  Val- 
uation in  Michigan  and  Wisconsin,  by  Mortimer  Elwyn 
Cooley,  Henry  Carter  Adams,  and  William  Dana  Tay- 
lor, 76-87. 

■ Express  Business  in  the  United  States,  1907.     By  Russell 

H.  Snead.     1908.     28  pp. 

^The  Steam  and  Street  Railroad  Car  Industry.  Manufac- 
tures, 1905.  (Special  reports  on  selected  industries)  1908, 
part  iv,  357-93.  From  Bulletin  84,  1907 :  37-75. 
Census  Office.  Report  on  Transportation  Business  in  the 
United  States  at  the  Eleventh  Census;  1890.  Part  i. 
Transportation  by  Land.  By  Henry  Carter  Adams. 
1895.    867  pp.     Serial  3018. 

Statistical  Report  of  the  Railroads  in  the  United  States. 

By  Armin  E.  Shuman.  Report  on  the  Agencies  of  Trans- 
portation in  the  United  States.  Tenth  census,  1880. 
1883:  iv,  1-639.     Serial  2132. 

— —Commission   to    Examine   the   Pacific   Railroad.      Report   on 
the  Pacific  Railroad.     1869.     52  pp. 

Addressed  to  the  secretary  of  the  interior,  but  it  does 
not  appear  in  the  annual  report  for  1869,  or  with  it, 
though  reference  to  it  is  made  in  that  report. 

. Commissioner   of   Railroads.     Annual    Report,    1881-1903.     In 

annual  report  of  the  secretary  of  the  interior. 
416 


BIBLIOGRAPHY 

Information  as  to  Provision  made  by  Pacific  Railroads  to 

Pay  Bonds.     1894.    5  pp.     Serial  3226. 
-Government  Directors  of  the  Union  Pacific  Railway.     Annual 

Reports,  1864-85.     1886.     252  pp.     Serial  2336. 
Annual  Report,  1886-92. 


-House   Committee   on   the   Judiciary.     The   Disposal    of   the 

Subsidies    Granted    Certain    Railroad   Companies.      1876. 

175  pp.     Serial   1706. 
Inquiry  as  to  Impeachment  in  Credit  Mobilier  Testimony. 

1873.     14  pp.     Serial  1577. 
Receivership  of  the  Northern  Pacific  Railroad  Company. 

1894.     22  pp.     Serial  3271. 
-House  Committee  on  Pacific  Railroads.     Amending  the  Various 

Pacific  Railroad  Acts.     1878.     10  pp.     Serial  1824. 
Amendment  of  the  Thurman  Act,     1888.     18  pp.      Serial 

2600. 

Pacific  Railroads.     1896.     13+30+8  pp.     Serial  3462. 

Railroad  and  Telegraph  Line  from  the  Missouri  River  to 

the  Pacific  Ocean.     1886.     11  pp.     Serial  2441. 
Railroad  and  Telegraph  Line  from  the  Missouri  River  to 

the  Pacific  Ocean.     1894.     12+95  pp.     Serial  3272. 
-House  Select  Committee  on  Credit  Mobilier  (No.  1).     Credit 

Mobilier  and  Dubuque  and  Sioux  City  Railroad.     1873. 

53  pp.     Serial   1577. 
-House  Select  Committee  on  the  Credit  Mobilier,  etc.     (No.  2.) 

Affairs  of   the  Union   Pacific  Railroad  Company.     1873. 

770+17  pp.     Serial  1577. 
Wilson  committee   report. 
Central  Pacific  Railroad  Company.     1873.    4  pp.     Serial 

1576. 
-House    Select   Committee   to   Investigate   the   Alleged   Credit 

Mobilier    Bribery.     Credit    Mobilier    Investigation.     1873. 

523  pp.     Serial  1577. 

Poland  committee  report. 
-House    Select    Committee    upon    the   Union    Pacific   Railroad 

Company   and   the   Credit   Mobilier   of   America.     Union 

Pacific  railroad  and  Credit  Mobilier.    1873.    4  pp.     Serial 

1577. 
-Industrial   Commission.     Final   Report,   1902.     xix.     1259  pp. 

Serial  4349.     Transportation,  by  William  Zebira  Ripley. 

Anon.     259-484. 

28  417 


RAILROAD  FINANCE 

' Peport  on  Transportation.     1900,  iv.    188-f832  pp.    Serial 

3992. 

Report    on    Transportation.     1901,    ix.     ccciii-j-1152    pp. 

Serial  4339. 

-Interstate  Commerce  Commission.  Accounting  Series  Circu- 
lars.    1906—. 

Issued  at  irregular  intervals. 

Annual  Report.     1887 — . 

Annual  Report  on  the  Statistics  of  Express  Companies. 

1909—. 

Annual  Report  on  the  Statistics  of  Railways.     1888 — -. 

Bulletin  of  Revenues  and  Expenses  of  Steam  Roads  in  the 

United  States.     190^—.     Monthly. 

Classification  of  Expenditures  for  Additions  and  Better- 
ments as  Prescribed  for  Steam  Roads.     1909.     44  pp. 

Same.     First  revised  issue.     1910.    41  pp. 

Classification  of  expenditures  for  Road  and  Equipment 

as   Prescribed   for   Steam   Roads,    1907.'   27   pp.     Supple- 
ment, 1908.     15  pp. 

Classification  of  Locomotive-miles.  Car-miles,  and  Train- 
miles.     1907.     18  pp. 

Classification   of   Operating   Expenses  as   Prescribed   for 

Steam  Roads.     1907.     130  pp.     Supplement.     1908.    41  pp. 

Classification   of   Operating  Revenues   as  Prescribed   for 

Steam  Roads.     1907.     15  pp.     Supplement.     1908.     13  pp. 

Classification  of  Revenues  and  Expenses  for  Outside  Op- 
erations as  Prescribed  for  Steam  Roads.     1908.     160  pp. 

Decisions  upon  Questions  Raised  under  Classifications  Pre- 
scribed for  Steam  Roads.  1909.  144  pp.  Accounting 
Bulletin  4. 

Evidence  Taken  in  the  Matter  of  Proposed  Advances  in 

Freight   Rates  by   Carriers,   August   to   December,   1910. 
1911.     10  V. 

Form  of  General  Balance  Sheet  Statement  as  Prescribed 

for  Steam  Roads.     1909.     36  pp. 

Same.     First  revised  issue.     1910.    34  pp. 

^In  the  Matter  of  Consolidations  and  Combinations  of  Car- 
riers, Relations  Between  Such  Carriers,  and  Community 
of  Interests  Therein,  Their  Rates,  Facilities,  and  Prac- 
tynns.     Reports.     Washington,  1908:  xii,  277-306. 

Same.     Rochester,   1907:  xii,  319-48. 

Intercorporate  Relationsliips  of  Railways  in  the  United 

418 


BIBLIOGRAPHY 

States  as  of  June  30,  1906.  1908.  516  pp.  Special  re- 
port 1. 

Interstate  Commerce  Corporations  Owning  Capital  Stock 

of  Other  Transportation  Corporations.  By  Henry  Carter 
Adams.     1908.     114  pp.     Serial  5264. 

In  the  Matter  of  ConsoUdations  of  Carriers  Subject  to  the 

Act  to  Regulate  Commerce,  including  method  of  associa- 
tion known  as  community  of  interest  plan.  1902.  154 
pp. 

An   Order  in  the   Matter  of   Destruction   of  Records  of 

Steam  Roads.     1909.     5  pp. 

Railways  in  the  United  States  in  1902.     State  Regulation 

of  Railways.  State  Taxation  of  Railways  and  Other 
Transportation  Agencies.  By  Henry  Carter  Adams. 
Parts  4  and  5.     415+462  pp.     Serial  4699. 

Stockholders  in  Certain  Railways  on  Record  June  30,  1904. 

1905.    10  pp.    Serial  4766. 

Stocks,  Bonds,  etc..  Subject  to  the  Act  to  Regulate  Com- 
merce.    1903.     5  pp.     Serial  4428. 

-Library  of  Congress.  A  List  o6  Books  (with  references  to 
periodicals)  Relating  to  Railroads  in  their  Relation  to 
the  Government  and  the  Public ;  second  issue,  with  select 
list  of  recent  works  relating  to  government  regulation 
and  government  ownership  of  railroads.  By  Appleton 
Prentiss  Clark   Griffin.     1907.     131   pp. 

Monthly  List  of  State  Publications.     1910—. 

Select  List  of  References  on  the  Valuation  and  Capitaliza- 
tion of  Railroads.  By  Hermann  Henry  Bernard  Meyer. 
1909.     28  pp. 

-Pacific  Railway  Commission.  Report  of  the  Commission  and 
of  the  Minority  Commissioners,  1887.  217  pp.  Serial 
2505. 

Testimony  Taken  by  the  United  States  Pacific  Railway 

Commission.     1887.    9  v.     Serials  2505  to  2509. 

-Railroad  Securities  Commission.  Report  to  the  President 
and  Letter  of  the  President  Transmitting  the  Report  to 
the  Congress.     1911.     42  pp. 

-Secretary  of  the  Interior.  Annual  Report,  with  accompany- 
ing documents      1849 — 

Contracts  between  Southern  Pacific  Railroad  and  Other 

Companies      1880.     14  pp.     Serial  2398. 

-Senate  Committee  for  Examination  of  the  Union  and  Central 

419 


RAILROAD  FINANCE 

Pacific  Railroads.     Final  completion  of  the  Pacific  rail- 
road.    18G9.     11  pp.     Serial  140G. 

-Senate  Committee  on  Interstate  Commerce.  Interstate  Com- 
merce Corporations  Owning  Capital  Stock  of  Other  Trans- 
portation Corporations.     1908.     114  pp.     Serial  52(54. 

-Senate  Committee  on  Pacific  Railroads.  Government  Debt 
of  the  Pacific  Railroads.  Notes  of  hearings  before  the 
committee  on  the  subject  of  the  indebtedness  of  the 
Pacific  railroads  to  the  government.  1896.  459  pp.  Se- 
rial 3357. 

(Partial  Report)  :     The  Pacific  Railroads.     1895.     121  pp. 

Serial  3288. 

Pacific  Railroads.     1869.     31+3  pp.     Serial  1362. 

-Senate  Committee  on  Pacific  Railroads.  Railroad  and  Tele- 
graph Line  from  Missouri  River  to  the  Pacific  Ocean. 
1897.     10+6+352  pp.     Serial  3569. 

Statement  by  Mr.  Collis  P.  Huntington.  37-300;  The 
Central  Pacific  Railroad  Debt,  California's  Remonstrance 
against  Refunding  it,  301-27 ;  Statement  and  Prayer  from 
the  Legislature  of  California,  328 ;  As  to  Refunding  the 
Central  Pacific  Debt,  329-36 ;  Extracts  from  the  Report  of 
the  U.  S.  Pacific  Railway  Commission  (1888),  337-45;  A 
Bill  to  Create  a  Board  of  Trustees  of  the  Union  Pacific 
Railway  Company,  and  the  Central  Pacific  Railroad  Com- 
pany, and  to  Fund  the  Bond  Debts  Thereof,  and  for  Other 
Purposes,  346-52. 

-Senate  Select  Committee  on  Evidence  Affecting  Certain  Mem- 
bers of  the  Senate.  Credit  Mobilier.  1873.  36+162 
pp.     Serial  1550. 

-Supreme  Court.  The  Northern  Securities  and  Others  vs. 
the  United  States.  Opinion  delivered  by  Mr.  Justice 
Harlan,  with  concurring  and  dissenting  opinions.  De- 
livered March  12,  1904.  October  term,  1903.  1904.  72  pp- 
Serial  4591. 

Same,    United    States    Reports.     St.    Paul,    1904:    cxciii, 

197-411. 

Same,  Railway  Age.     Chicago,  1904:  xxxvii,  659-77. 

Same,  Abridged.     Ripley,  Trusts,  Pools  and  Corporations. 

Boston,  1905:  322-81. 

-Treasury   Department.      Report   on   the    Internal   Commerce 
of  the  United  States.     1876,  1878,  1880,  1884,  1886,  1889, 
1890.     Serials:   1761,    1817,   1960,   2295,   2476,   2738,  2854. 
420 


BIBLIOGRAPHY 

Van  Oss,  Steven  Fredeeick.  American  Railroads  and  British 
Investors.     London,  1893.     188  pp. 

American  Railroads  as  Investments.     N.  Y.,  1898.     815  pp. 

Recent  Railway  Reorganizations,  Journal  of  Finance.  Lon- 
don, 1898:  iii,  345-55,  566-74. 

Vermont.  Report  of  the  Joint  Special  Committee  to  Investigate 
the  Vermont  Central  Management.  St.  Albans,  1873. 
470+564-21  pp. 

Vermont  Central  and  Vermont  and  Canada  Railroads.  Report 
of  Trustees  and  Managers,  and  Action  of  the  Stock  and 
Bondholders.     Boston,  1872.     39  pp. 

Vernon,  Edward.  American  Railroad  Manual  for  the  United 
States  and  the  Dominion.     N.  Y.,  1873-4.     Annual. 

ViLLABD,  Henry.     Memoirs  of  Henry  Villard,  Journalist  and  Fi- 
nancier.    Boston,   1904.     ii. 
Railroads,  272-376. 

Statement  to  the  Stockholders  of  the  Northern  Pacific  Rail- 
road.    N.  Y.,  1884.     24  pp. 

Virtue,  G.  O.  The  Minnesota  Railway  Valuation,  Quarterly 
Journal  of  Economics.     Boston,  1909:  xxiii,  542-7. 

Wager,  Daniel  E.  The  Syracuse  and  Utica  Railroad,  Oneida 
Historical  Society,  Transactions.     Utica,  1881 :  i,  144-55. 

Wait,  Frederick  S.  A  Practical  Treatise  on  Insolvent  Corpora- 
tions, including  the  liquidation,  reorganization,  forfeiture, 
dissolution,  and  winding  up  of  corporations.  N.  Y.,  1888. 
711  pp. 

Waite,  E.  G.  Californian  Overland  Railways.  Overland  Monthly. 
San  Francisco,  1875:  xiv,  9-17. 

Walker,  Herbert  T.  Early  History  of  the  Delaware,  Lacka- 
wanna and  Western  Railroad,  Railroad  Gazette.  N.  Y., 
1902:  xxxiv,  388-90,  408-9,  440-1,  476-7,  506-7,  530-2, 
548-9,  566-7,  586-8. 

Walker,  John  Brisben.  The  Denver  and  Rio  Grande ;  sixteen 
hundred  miles  of  mountain  railways.  Cosmopolitan, 
N.  Y.,  1895:  xix,  14-28. 

The  Wall  Street  Journal.     N,  Y.,  1852—.     Daily  since  1882. 

Wallace,  John  Findley.  The  Cost  of  Railroad  Construction, 
Engineering  Magazine.     N.  Y.,  1895:  x,  472-7. 

Wabman,  Cy.  The  Story  of  the  Railroad.  N.  Y.,  1899.  280  pp. 
Popular  account  of  building  the  transcontinental  rail- 
road. 

Washington.     Railroad  Commission.     Findings  of  Facts  Relative 

421 


RAILROAD  FINANCE 

to  the  Valuation  of  Railroads  in  the  State  of  Washing- 
ton.    Olympia,  1909.     354  pp. 

From  annual  reports,  1907-8:  125-449. 

Waterman,  Thomas  W.  A  Treatise  on  the  Law  of  Corporations 
Other  than  Municipal.     N.  Y.,  1888.     2  v. 

Watson,  Archibald  R.  Receivers  of  Railroads,  American  and 
English  Encyclopsedia  of  Law.  Northport  (N.  Y.), 
(2  ed.),   1903:   xxiv,   1-42. 

Webb,  Walter  Loring.  The  Economics  of  Railroad  Construction, 
N.  Y.,  1906.     339  pp. 

Railroad  Construction:    theory  and  practice.     N.  Y.   (2  ed.), 

1903.     675  pp. 

Wheeler,  Olin  D.     The  Story  of  a  Railway,  Wonderland.  1900, 
St.  Paul,  1900:  77-103. 
Northern  Pacific. 

White,  Henry  Kirke.  History  of  the  Union  Pacific  Railway. 
Chicago,  1895.     129  pp. 

White,  Kenneth  G.  White's  Reference  Book  of  Railroad  Se- 
curities. Railroads  classified  according  to  systems,  con- 
trolled through  lease  or  ownership.  N.  Y.,  1893-7.  Semi- 
annual. 

White  and  Kemble.     Atlas  and  Digest  of  Railroad   Mortgages. 
N.  Y. 
A  map  for  each  important  system. 

Whitehead,  Herbert  Clarkson.  The  Railway  Auditor :  an  out- 
line of  the  system  of  railway  accounting.  N.  Y.,  1902. 
42  pp. 

Whitney,  Travis  H.  The  Public  Service  Commissions  Act  of 
New  York,  Green  Bag.     Boston,  1907:  xix,  412-24. 

Whitbidge,  Frederick  Walling.  Official  Valuation  of  Private 
Property,  American  Economic  Association,  Quarterly. 
Princeton,  1910  (3  ser.),  xi,  239-52. 

WiLGUS,  Horace  La  Fayette.  The  Northwestern  Railway  Situa- 
tion, Michigan  Law  Review.     Ann  Arbor,  1903 :  1,  251-76. 

Williams,   W.   H.    Railway   Capital   and  Values,    Railway   Age 

Gazette.     N.  Y.,  1909:   xlvi,  903-5. 
• Valuation  of  Public  Service  Corporations.     Albany,  1910.     51 

pp. 

Same,  American  Economic  Association,  Quarterly.  Prince- 
ton.    1910  (3  ser.),  xi,  196-238. 

Wilson,  William  Bender.  History  of  the  Pennsylvania  Railroad 
Company,  with  plan  of  organization,  portraits  of  oflicials, 

422 


BIBLIOGRAPHY 

and    biographical     sketches.     Philadelphia,     1899.    2     v. 
.Wisconsin.     Railroad  Commission.     A.  E.  Buell  vs.  Chicago,  Mil- 
waukee, and  St.  Paul  railway  company.    Madison,  1907. 

191   pp. 

Two-cent  passenger  fare  decision. 

Report.     Madison,    1907—. 

Valuation  of  railroads. 

State  Tax  Commission.     Report,  1905 — . 

Valuation  of  railroads. 
Wood,  Horace  Gay.    A  Treatise  on  the  Law  of  Railways.    Edited 

by  H.  D.  Minor.    Boston  (2  ed.),  1894.    3  v. 
Wood,  William  Allen.    Modern  Business  Corporations,  Including 

the  organization  and  management  of  private  corporations 

with     financial    principles    and    practices.     Indianapolis, 

1906.     358  pp. 
WooDLOCK,   Thomas   Francis.     Anatomy   of   a   Railroad   Report. 

N.  Y.,  1895.     72  pp. 
The  Anatomy  of  a  Railroad  Report,  and  Ton-mile  Cost.    N.  Y., 

1900.     121   pp. 
The  Increased  Confidence  in  American  Securities,  Engineer- 
ing Magazine.     N.  Y.,  1897:  xiii,  165-71. 
The    Physical    Aspect   in    Railroad    Accounting,    Engineering 

Magazine.     N.  Y.,  1897:  xiii,  340-6. 
The    Present    Position    of    American    Railroads,    Economist. 

London,  1901:   lix,  1304-5,  1335-6,  1363-4,  1395-6,  1431-3. 
WooLMAN,   Henry.     The  Bane  of  Friendly  Receiverships,  North 

American  Review.     N.  Y.,   1894:   clviii,  250-1. 
Wyman,  Bruce.    The  Actual  Decision  in  the  Merger  Case,  Green 

Bag.  Boston,  1904 :  xvi,  258-60. 
The   Conflicting   Opinions   in   the   Merger   Case,   Green    Bag. 

Boston,  1904:  xvi,  298-304. 
The  Special  Law  Governing  Public  Service  Corporations  and 

All  Others  Engaged  in  Public  Employment.     N.  Y.,  1911. 

2  v. 

Proper    Basis    of    Capitalization ;     Rate    of    Return ; 

Operating  Expenses,  965-1048. 
Yates,  Robert.     Valuation  of  Railway  Properties,  Railway  Age 

Gazette.     N.  Y.,  1909:  xlvii,  975-8. 
Young  Men's  Christian  Association  of  the  City  of  New  York — 

Railroad   Branch.     Catalogue  of  the  Library.     Compiled 

by   Wllbert  L.   McKinlay      N.    Y.,   1905.    210  pp. 
Railroads,  131-51. 

423 


RAILROAD  FINANCE 

YouNQMAN,    Anna.     The   Econonaic  Causes   of   Great   Fortunes. 
N.  Y.,  1909.     185  pp. 

American    Railway     Development,     Saturday     Review.      London, 

1901 :  xcii,  169-70,  203-4,  295-6. 
Baltimore  and  Ohio  Railroad,  North  American  Review.     Boston, 

1827:    XXV,   62-73. 
The  Big  Vanderbilt  "Job,"  Journal   of  Finance.     London,   1898: 

iii,  250-8. 

Consolidation. 
The  Business  of  a  Bond  House,  Van  Norden  Magazine.     N.  Y., 

1906 :  i,  no.  i,  248,  no.  ii,  49-51. 
California  Credit   Mobilier,   alias   Contract  and  Finance  Co.  of 

the  Central  Pacific   Railroad.     From   the  San   Francisco 

Bulletin.     San  Francisco,   1873.     13  pp. 
Car  Trusts.     Commercial  and  Financial  Chronicle.    N.  Y.,  1905-6: 

Ixxxi,   1760-2,   Ixxxii,  361-3,   839-41,   873-4,   1296-7. 
A  Chapter  of  Wabash,   North   American  Review.     N.  Y.,   1888: 

cxlvi,  178-93. 

"Friendly"  receivership. 
Chevalier  and  Cooper  on  Europe  and  America,  Quarterly  Review. 

London,  1837:  Iviii,  497-523. 
Col.  Scott  as  a  Railroad  Manager,  Builder,  and  Financier,     n.p., 

n.d.     31  pp. 

Texas  and  Pacific. 
Combinations  in   Restraint  of   Interstate  Commerce;    Device   of 

two  competing  railway  companies  transferring  a  majority 

of  their  shares  to  a  "holding  company"  created  under  the 

laws  of  a   remote  state.     The  Northern  Securities  case, 

American  Law  Review.     St.  Louis,  1903 :  xxxvii,  449-61. 
The   Convertible   Railroad   Bond,   Railway   Age  Gazette.     N.   Y., 

1908:  xlv,  1518-9. 
Depreciation    in    Railway    Accounting,    Railway   Age.      Chicago, 

1907:  xliii,  728-9. 
Eminent  Domain  in  Minority  Shares,  Railroad  Gazette.     N.   Y., 

1907:  xlii,  99. 
The  Evolution  of  Railway  Statistics,  Railway  Age.    Chicago,  1901 ; 

xxxii,  621-2. 
The  Evolution  of  the  Railroad  Bond,  Railroad  Gazette.     N.  Y., 

1904:   xxxvi,  300-7. 
Expert  Valuation  of  Railway  and  Other  Corporate  Property  in 

Michigan,  Engineering  News.     N.  Y.,  1900:  xliv,  430-5. 
424 


BIBLIOGRAPHY 

The  Express  Companies.  Railroad  Gazette.    N.  Y.,  1906:  x\i.  70-1. 

Fraudulent  Issue  of  Railroad  Stock,  Hunt's  Merchants'  Magazine 
and  Commercial  Review.     N.  Y.,  1854:  xxxi,  207-9. 
The  Schuyler  frauds. 

The   Freebooters   of   American   Finance,    Blackwood's    Magazine. 
Edinburgh,  1884:  cxxxvi,  114-24. 
Speculative  construction. 

Friendly  Receivers,  Bradstreet's.     N.  Y.,  1894:  xxii,  53-4. 

The  Genealogy  of  the  New  Haven,  Railway  Age  Gazette.  N.  Y., 
1911 :  1,  356-7. 

Good  Practice  in  Railway  Accounting,  Railway  Age.  Chicago, 
1902:  xxxiii,  826. 

Government  Regulation  of  Railroad  Securities,  Railway  Age  Ga- 
zette.    N.  Y.,  1908:   xlv,  461-2. 

Great  Northern's  Financial  Methods,  Railway  Age.  Chicago, 
1906:  xlii,  721-2. 

The  Great  Railway  Systems,  Railroad  Gazette.  N.  Y.,  1906: 
xl,  467-8. 

Growth  of  Railroad  Bonding,  Railroad  Gazette.  N.  Y.,  1904: 
xxxvii,  590. 

The  Harriman  Dividends,  Railroad  Gazette.  N.  Y.,  1906:  xli, 
151-2. 

History  of  Railroads,  including  the  statistics  of  their  present  con- 
dition and  future  progress,  Bankers'  Magazine.  N.  Y., 
1858 :  xii,  689-410. 

History  of  the  Old  Colony  Railroad.  A  complete  history  of  the 
Old  Colony  railroad  from  1844  to  the  present  time,  Bos- 
ton, 1893.     512  pp. 

History  of  the  Old  Colony  Railroad,  9-130 ;  Lease  of  the 
Old  Colony  Railroad  to  the  New  York,  New  Haven,  and 
Hartford  Railroad,  480-2.  The  rest  of  the  volume  is  de- 
voted to  local  historical  and  descriptive  matter. 

How  Congressmen  are  Bribed,  The  Colton  Letters.  Declaration 
of  Huntingdon  that  congressmen  are  for  sale,  n.p.,  n.d. 
12  pp. 

How  Great  Railway  Systems  are  Merged.  A  chart  which  will 
enable  the  investor  to  see  at  a  glance  the  position  of 
various  railway  stocks.  Financier.  N.  Y.,  Dee.  23,  1901: 
Ixxviii. 

How   the   Unmerged   Pacific   Roads   now   Stand,   World's   Work. 
N.  Y.,  1904:  viii,  4846-8. 
425 


RAILROAD  FINANCE 

How  to  Build  Railroads,  Mortgage  Tliem  for  Twice  their  Value 
Before  They  are  Built,  Keep  Half  the  Bonds  and  the 
Railroad  Also — The  Value  of  Such  Bonds  as  an  Invest- 
ment, American  Law  Review.  St.  Louis,  1895:  xxix, 
905-12. 
How  to  Incorporate  a  Railroad  Trust.  Text  of  the  charter  of 
the  Southern  Pacific  company  of  Kentucky,  American 
Law  Review.  St.  Louis,  1895:  xxix,  899-905. 
The  Important  Function  of  the  Accounting  Department,  Railway 
Age  Gazette.     N.  Y.,  1911 :  1,  508-9. 

Improvements    in    Inland    Transport — Railroads,    Edinburgh    Re- 
view.    Edinburgh,  1834:  Ix,  94-124. 

Independent  Audit  of  Railway  Accounts,  Commercial  and  Finan- 
cial Chronicle.     N.  Y.,  1895:   Ixi,  G35-7. 

Is  it  Safe  to  Invest  in   Southern  Pacific  Stock?  World's   Work. 
N.  Y.,   1906:   xii,  8043-6. 

Issue  of   Stock   Below   Par  and   Sale  of   Bonds   at   a   Discount, 
Railway  Age  Gazette.    N.  Y.,  1911 :  1,  1309-11. 

The  Law  and  Standing  of  the  Voting  Trust,  Railroad  Gazette. 
N.  Y.,  1895:  xxvii,  106-7. 

Limitations    of    Independent    Audit,    Commercial    and    Financial 
Chronicle.    N.  Y.,  1895:  Ixi,  988-90. 

Maintenance  Expenses  and  Concealment  of  Earnings,  Journal  of 
Accountancy.     N.  Y.,  1906:  i,  410-2. 

Maintenance  Expenses  in  Relation  to  Dividends,  Railway  World. 
Philadelphia,  1903:  xlvii,  1129-30. 

The  Merger  Case,  Nation.     N.   Y.,  1903:   Ixxvi.  304-5. 

Methods    and    Practice   of   Railroad    Receivership,    Railway    Re- 
view.    Chicago,  1893:  xxxiii,  767-8. 

Minority    Stockholders'    Rights,    Railway    Age.      Chicago.    1906: 
xlii,  251-2. 

Mr.    Hansel   on    Valuation,    Railway   Age.     Chicago,    1907:    xliv, 
276-7. 

Mr.   Hansel  on   Valuation  of   Railways,   Railway  Age.     Chicago, 
1907:  xliv,  71-2. 

The   Modern    Accounting    Office,   by   "S.    E.,"    Railroad   Gazette. 
N.  Y.,  1899:  xxxi,  429-30. 

Modern  Methods  of  Railroad  Building,  Railroad  Gazette.     N.  Y., 
1907:  xlii,  325-6. 

Mutations   of   Railroad    Investment,    Railroad   Gazette.       N.    Y., 
1904:  xxxvii,  334. 

426 


BIBLIOGRAPHY 

The  Mysteries  of  American  Railway  Accounting,  North  American 

Review.     N.  Y.,  1879:  cxxviii,  135-47. 
A  New  England  Historical  Note,  Railroad  Gazette.     N.  T.,  1904: 

xxxvi,  128. 
Central  New  England  railroad. 
The  New  Haven  Valuation,  Railway  Age  Gazette.     N.  Y.,  1911: 

1,  4G1-2. 
The  New  Haven's  Electric  Expansion,  Railroad  Gazette,     N.  Y., 

190G:  xli,  543-4. 
A  New  Phase  of  Railway   Consolidation,  Railway  Age   Gazette. 

N.  Y.,  1911 :  li,  272. 
New  Phases  of  Railroad  Finance,  Railroad  Gazette.     N.  Y.,  1906 : 

xl,  99-100. 
New  Phases  of  Railroad  Finance,  Railroad  Gazette.    N.  Y.,  1906: 

xli,  191. 
No  Depreciation  Account  in  Railroading,  Railway  World.     Phila- 
delphia, 1906:  1,  1048. 
Oakes    Ames:    A    Memoir.     Cambridge,    1883.     143    pp. 

Credit  Mobilier. 
Official  Accounting,  Railway  Age,     Chicago,  1906:  xlii,  280. 
On  the  Extension  of  Railways  in   America,   Frazer's  Magazine. 

London,  1873:  Ixxxvii,  702-12. 
One  View  of  Railroad  Capitalization,  Railway  Age  Gazette.    N.  Y., 

1908:  xlv,  365-6. 
Organization   of   the   Accounting   Department,    Railroad   Gazette. 

N.  Y.,  1893:  xxv,  552. 
Pacific    Railroads.      Sinking    Fund    for    the    Liquidation    of    the 

Government    Bonds    Advanced    in    Aid    of    Construction. 

Arguments  before  the  committee  on  the  judiciary,  United 

States  senate.     (45  cong.,  1  sess.)      [Washington,  1877?] 

212+33  pp. 
A  Phase  of  Eminent  Domain,  Railroad  Gazette.     N,   Y,,   1905: 

xxxviii,  3-4, 

Minority  shares. 
A  Phase  of  Railroad  Bonding,  Railroad  Gazette.     N.  Y.,  1906: 

xl,  318. 
Consolidation  and  the  investor. 
The   Policy   of   Railw^ay    Sinking   Funds,    Railway    Age   Gazette. 

N.  Y.,  1911 :  li,  360-1. 
The  Popularity  of  Convertible   Bonds,   Railway   Age.     Chicago, 

1906:  xlii,  404-5. 

427 


RAILROAD  FINANCE 

Progress  of  Valuation  of  Railways,  Railway  Age.    Chicago,  1908: 
xlv,  103-4. 

Railroad  Balance   Sheets,   Railroad  Gazette.     N.   Y.,   1893:   xxv, 
373-4. 

Railroad    Investments    in    Outside    Securities,    Railway    World. 
Philadelphia,   1903:  xlvii,   1159-60. 

Railroad  Receiverships,  Railroad  Gazette.     N.  T.,  1894 :  xxvi,  8G. 

Railroad  Stock  Watering,  Nation.     N.  Y.,  1884:  xxxix,  128-9. 

Railroads  in  Default  Since  the  Panic  of  1873.  Commercial  and 
Financial  Chronicle.     N.  Y.,   1876:  xxii,  75-9. 

Railroads  of  the  United  States,  Bankers'  Magazine.     N.  Y.,  1865: 
XX,  307-28. 

Railway  Building  in  the  United  States,  Saturday  Review.     Lon- 
don, 1886:  Ixii,  751-2. 

Railway    Cost   Accounting    and   Rates,    Railway    Age.       Chicago, 
1908:  xlv,  299-300. 

Receivers,   by    "A.    Q.    K.,"    New   Jersey    Law    Journal.      Somer- 
ville   (N.  J.),  1882:  v,  292-4. 

Receivers   of   Solvent    Railways,    Railway    Age.      Chicago,    1902: 
xxxiv,  330. 

Reconstruction  of  American   Railroads,   Railway   World.     Phila- 
delphia, 1903:  xlvii,  1243-4. 

Regulation  of  the  Issuance  and  Ownership  of  Railway  Securities, 
Railway  Age  Gazette.     N.  Y.,  1910:  xlviii.  124-6. 

Relations  and   Rights  of   Syndicate   Members,   Lawyers'   Reports 
Annotated.     Rochester,   1897:   xl,  216-33. 

Rock  Island's  New  Capital  Plan,  Railroad  Gazette.     N.  Y.,  1902: 
xxxiv,  626-7. 

The    Romance    and    Reality    of    American    Railroads,    Quarterly 
Review.     London,  1884:  clviii,  79-104. 

Shall    Repairs    and    Improvements    be    Divorced?    Railway    Age. 
Chicago,  1903:  xxxv,  578-90. 

Some  Phases  of  Railroad  Consolidation,  Railway  World.     Phila- 
delphia, 1903 :  xlvii,  963-4. 

The  Status  of  the  Holding  Corporation,  Railroad  Gazette.     N.  Y., 
1906:  xli,  327. 

Stockholders'    Rights   in   "Captured"    Railroads,    Nation.      N.    Y., 
1883:   xxxvii,   429-30. 

The  Story  of  That  Lease.     A  hitherto  unwritten  chapter  of  in- 
side   railroad    history.     Winslow's    sharpest    tricks    and 
how  the  Burlington,  Cedar  Rapids,  and  Northern  stock- 
holders were  sold  out.    n.p.  [1885].    38  pp. 
428 


BIBLIOGRAPHY 

A  Study  in  Railroad  Receiverships,  Railroad  Gazette.  N.  Y., 
1904:   xxxvii,   20G-7. 

Syndicates,  Economist.     London,  1873:  xxxi,  994. 

The  Union  Pacific  Railroad  Company,  Journal  of  Finance.  Lon- 
don,  1898:  iv,  885-94. 

The  Union  Pacific's  Assets,  Nation.     N.   Y.,   1909:   Ixxxix,   171-2. 

An  Unseen  Factor  in  Railway  Valuation,  Railway  Age  Gazette. 
N.  Y.,  1911:  1,  821-2. 

Validity  and  Interpretation  of  the  Sherman  Anti-trust  Act,  Amer- 
ican Law  Review.     St.  Louis,  1904:  xxxviii,  421-31. 

Valuation  of  Railways  in  Minnesota,  Railway  Age.  Chicago,  1907 : 
xliv,  877-80. 

Valuation  of  Washington  Railways,  Railway  Age.  Chicago,  1908: 
xlv,  113. 

The  Wabash  Receivership  Case,  American  Law  Review.  St. 
Louis,    1887:   xxi,   141-5. 

The  West  Shore  Enterprise,  Bradstreet's.     N.  Y.,  1885:  xi,  274-7. 

The  Western  Pacific,   Railroad  Gazette.     N.   Y.,  1900:   xl,  252-3. 

What  Is  Stock  Watering?  Railroad  Gazette.  N.  Y.,  1907:  xlii, 
399. 


INDEX 


INDEX 


Accountant,  car,  preparation  of 
car  service  reports  by,  194. 

Accountant,  certified  public, 
service  of,  to  shai'eholders, 
103-4. 

Accounting  department,  develop- 
ment of,  178-83 ;  organization 
and  procedure  of,  183-204 ; 
statistical  work  of,  204-10; 
reports  of,  210-2. 

Accounts :  in  general,  178-85 ; 
freight  receipts,  185-8 ;  pas- 
senger receipts,  188-90 ;  dis- 
bursements, 190-5 ;  operating, 
195-7 ;  income  and  profit  and 
loss,  197-9 ;  outside  opera- 
tions, 198n-9n ;  balance  sheet, 
in  Great  Britain,  113-20;  bal- 
ance sheet,  in  U.  S.,  120-9, 
199-204. 

Acworth,  W.  M.,  on  reorganiza- 
tions in   U.   S.,   269-70. 

Adams,  C.  F.,  Jr.,  on  overcapi- 
talization,  334,   337. 

Adams,  H.  C,  on  equipment  de- 
preciation, 92-4 ;  on  additions 
and  betterments  accounts, 
148 ;  on  reports,  182-3 ;  on 
balance  sheet,  201-4 ;  on  rail- 
road holdings  of  railroad  se- 
curities, 292-3 ;  on  valuation 
of  railroad  realty,  328 ;  on 
Michigan  railroad  appraisal, 
331-2. 

Additions  and  betterments, 
capitalized  funds  for,  134-5, 
265 ;  definition  and  purpose 
of,  138-9 ;  Ilarriman's  policy 
In  regard  to,  139-40;  practice 


of,  in  Great  Britain,  140; 
practice  of,  in  U.  S., 
140-7 ;  Interstate  Commerce 
Commission  requirements  for, 
147-8;  work  of  receivers  in 
connection  with,  239-40;  bib- 
liography of,  360. 

Administratie  kantoren,  man- 
agement of  Dutch  investments 
in  American  railroads  by 
means  of,  101. 

Alabama  and  Chattanooga,  314. 

Alabama  and  Great  Southern, 
acquired  by  Alabama  Great 
Southern  railway  company, 
314. 

Alabama   and   Vicksburg,   315. 

Alabama  Great  Southern  rail- 
way company,  an  English 
holding  company,  controlled 
by  the  Southern,  314-5. 

Alabama,  New  Orleans,  Texas, 
and  Pacific  Junction  rail- 
ways company,  an  English 
holding  company,  312-3. 

Alton  and  St.  Louis,  acquired 
by  Chicago  and  Alton,   293. 

American  Car  and  Foundry 
company,  81. 

American  Express  company,  re- 
lation of,  to  New  York  Cen- 
tral and  the  Boston  and 
Maine,   279. 

American  Investment  Trust, 
management  of  British  in- 
vestments in  American  rail- 
roads through,  101-2. 

American  Locomotive  company, 
81. 


29 


433 


INDEX 


American  Securities  Investment 
company,  311. 

Ames,  Oakes,  connection  of, 
with  Credit  Mobilier.  6G-70. 

Arizona,  limitation  of  railroad 
bond  issues  in,  348. 

Assessments,  of  shareholders, 
256-9;  of  .lunior  bondholders, 
259-61. 

Assets,  as  capital,  34-8,  45,  107, 
320-5 ;  accounting  require- 
ments of  British  law  concern- 
ing, 112-G,  120;  maintenance 
of,  129-38 ;  additions  and  bet- 
terments in  relation  to,  138- 
48.  See  also  Overcapitaliza- 
tion. 

Association  of  American  Rail- 
way Accounting  Officers, 
work  for  uniformity  of  ac- 
counting procedure  by,  182. 

Atchison,  Topeka  and  Santa  F§, 
underwriting  by,  25-6 ;  land 
grant  to,  33 ;  shareholders' 
rights  in,  47;  short  term 
notes  of,  49 ;  land  income 
bonds  issued  by,  56 ;  exten- 
sions of,  74,  76 ;  terminals  of, 
79 ;  equipment  of,  89  ;  "  scien- 
tific "  management  of,  161 ; 
receivership  of.  235-6,  240, 
244 ;  relation  of,  to  receiver- 
ship of  Denver  and  Rio 
Grande,  246 ;  reorganization 
of,  252-3,  256,  260,  262,  264, 
266,  270,  336;  community  of 
interest,  and,  279;  shares 
of,  held  by  Union  Pa- 
cific, 287,  314 ;  acquisition  of 
San  Francisco  and  San  Joa- 
quin by,  288;  lease  of  Denver 
and  Rio  Grande  by,  302 ;  ten- 


dency toward  absolute  owner- 
ship of  subsidiary  lines  by, 
299. 

Atlantic  and  Danville,  receiver- 
ship  of,    244. 

Atlantic    and    Great    Western, 
construction  contract  of,  59 
equipment   contracts    of,    88 
receiverships    of,    225-6,   233 
leased  by  the  Erie,  276-7. 

Atlantic  and  Pacific,  cause  of 
insolvency  of,  219;  receiver- 
ship of,  246 ;  reorganization 
of,  263. 

Atlantic  and  St.  Lawrence,  con- 
trolled by  Grand  Trunk,  285. 

Atlantic  Coast  Line  company,  a 
non-operating  holding  com- 
pany, 311  ;  partial  control  of 
the  Southern  territory  by, 
282;  system  mileage  of,  287; 
control  of  Atlantic  Coast  Line 
railroad  by,  311. 

Atlantic  Coast  Line  railroad, 
consolidation  of,  311;  pur- 
chase of  Cape  Fear  and  Yad- 
kin by,  255 ;  control  of  Louis- 
ville and  Nashville  by, 
282,  293;  controlled  by  the 
Atlantic  Coast  Line  com- 
pany, 311 ;  interest  of  Rich- 
mond-Washington company 
in,  315-6. 

Auditor,  position  of,  in  railroad 
organization,  179-80 ;  proced- 
ure of,  183-5. 

Auditor,  independent,  service  of 
to  shareholders,  103-4,  116-8, 
140. 

Auditor  of  disbursements,  pro- 
cedure of,  190-5 ;  prepara- 
tion of  statistics  by,  204. 


434 


[NDEX 


Auditor  of  freight  receipts,  pro- 
cedure of,  185-8 ;  preparation 
of  statistics  by,  204. 

Auditor  of  passenger  receipts, 
procedure  of,  188-90;  prepar- 
ation of  statistics  by,  204. 


Balance  sheet,  as  a  statement 
of  capital,  34-G,  326-8 ;  as  pre- 
scribed by  British  law,  113-6, 
118 ;  double  form  of,  proposed 
for  American  railroads.  HO- 
BO ;  Interstate  Commerce 
Commission  requirements 

concerning,  200-4,  326. 

Baldwin  Locomotive  Works,  81. 

Baltimore  and  Ohio,  invest- 
ment basis  of,  1-2 ;  subsidized 
by  Maryland,  31-2;  exten- 
sions of,  73;  entrance  into 
Philadelphia  of,  152;  mis- 
leading accounts  and  reports 
of,  181-2,  222;  relation  of,  to 
receivership  of  Ohio  and  Mis- 
sissippi, 221 ;  extension  of,  to 
Chicago,  276;  lease  of,  by 
Central  Ohio,  276,  301; 
and  community  of  interest, 
278-9;  shares  of,  held  by 
Union  Pacific,  287,  316;  con- 
test of,  with  the  Pennsylvania 
for  control  of  Philadelphia, 
Wilmington  and  Baltimore, 
294 ;  joint  control  by,  of  the 
Reading,  297 ;  interest  of,  in 
Richmond-Washington  com- 
pany, 315-6 ;  reorganization 
of,  336 ;  shareholders'  rights 
in,  and  inflation  of,  338. 

Baltimore  and  Port  Deposit, 
merging  of.   in   Philadelphia, 


Wilmington,  and  Baltimore, 
274. 

Baltimore  and  Susquehanna, 
investment  basis   of,   1-2. 

Baltimore,  Pittsburg,  and 
Chicago,  as  extension  of 
Baltimore  and  Ohio  system 
to  Chicago,  276. 

Bangor  and  Aroostook,  the 
single  surviving  independent 
local  railroad  in  New  Eng- 
land, 285. 

Bank,  First  National,  of  New 
York,  railroad  afiiliations  of, 
280;  National  City,  railroad 
and  Standard  Oil  affiliations 
of,  280. 

Banking  privilege,  as  aid  to 
railroads,  17-8. 

Bankruptcy.  See  Insolvency; 
Receivership. 

Banks,  as  railroad  funding 
agencies,  20-30,  48;  as  regis- 
trars of  securities,  99,  105; 
as  agencies  of  reorganization, 
253,  270-1  ;  affiliations  of, 
with  railroads,  280. 

Barings,  railroad  and  banking 
affiliations  of,  in  U.  S.,  280. 

Beach,  C.  F.,  Jr.,  on  plan  for 
railroad  trust,  303-4;  on  rail- 
road managers  and  Wall 
Street,  320-1. 

Bellefontaine  and  Indiana, 
shares  of,  exchanged  for  land, 
labor,  and  materials,  53 ;  con- 
solidation of,  with  Indian- 
ai)olis,  Pittsburgh,  and  Cleve- 
land, 274-5. 

Bf'loit  and  Madison,  merged  In 
Chicago  and  Northwestern, 
301. 


435 


INDEX 


Betterments.  See  Additions  and 
betterments. 

Bibliograpliy,  general,  353-4 ;  of 
periodicals,  354-0 ;  of  his- 
tories and  foreign  studies, 
358-9  ;  of  construction,  359-60  ; 
of  equipment,  300 ;  of  addi- 
tions and  betterments,  360 ; 
of  management,  361 ;  of  ac- 
counts, 361-3;  of  statistics, 
363;  of  reports,  363-4;  of  re- 
ceivership, 364-6 ;  of  re- 
organization, 366-7 ;  of  con- 
solidation, 367 ;  of  overcapi- 
talization. 368-9. 

"Big  Four."  See  Cleveland, 
Cincinnati,  Chicago,  and  St. 
Louis. 

Blackstone,  T.  B.,  loss  of  con- 
trol by,  of  Chicago  and  Alton 
to  Harriman,  298. 

Bonds,  underwriting  of,  21-8 ; 
as  capital  obligations,  38, 
41-2 ;  market  for,  44 ;  privi- 
leged subscriptions  to,  46-7 ; 
convertible,  46-7 ;  as  basis 
of  construction,  51-6,  72-4,  77 ; 
nature  of,  as  security,  54-5, 
230-1,  250,  260-1,  264;  pay- 
ment of,  to  contractors,  58- 
63 ;  collateral  trust  as  basis 
of  construction  of  exten- 
sions, 73-4 ;  bridge,  77-8 ; 
terminal,  78-9 ;  equipment, 
85-0 ;  payment  of  princi- 
pal and  interest  on,  98-9 ; 
Income,  261-2 ;  as  aids  to 
consolidation,  292-4.  See 
also  Insolvency ;  Rec-eiver- 
ship ;  Reorganization ;  Sink- 
ing funds. 

Boonville    Bridge    company,    fi- 


nanced by  Missouri,  Kansas, 
and  Texas,  78. 

Boston  and  Albany,  consolida- 
tion of,  273,  290;  controlled 
by  New  York  Central,  153, 
279,  284-5,  316;  relation  of, 
to  the  New  Haven,  285. 

Boston  and  Lowell,  investment 
basis  of,  1 ;  shareholders' 
rights  in,  47 ;  constructed  on 
share  basis,  51. 

Boston  and  Maine,  inferior  con- 
struction of,  by  contract,  58 ; 
consolidation  of,  273 ;  com- 
munity of  interest  and,  279 ; 
controlled  by  the  New  Haven, 
284-5,  317;  subsidiary  trac- 
tion lines  of,  285. 

Boston  and  Portland,  inade- 
quacy of  early  accounts  of, 
181. 

Boston  and  Providence,  invest- 
ment basis  of,  1,  8-9 ;  early 
accounting,  procedure  of,  180. 

Boston  and  Worcester,  con- 
solidation of,  with  the  West- 
ern at  Boston  and  Albany, 
273,  290. 

Boston,  Concord,  and  Montreal, 
consolidation  of,  285-6. 

Boston.  Norwich,  and  New 
Loudon,  banking  privilege  of, 
18. 

Boston  Railroad  Holding  com- 
pany, control  by,  of  Boston 
and  Maine  in  interest  of  the 
New   Haven,  317. 

Bridges,  financing  of  construc- 
tion of,  77-8. 

Budget,  need  for  elasticity  of, 
158. 

Buffalo     and     Niagara     Falls, 


436 


INDEX 


merged  in  New  York  Central, 
291. 

Buffalo,  New  York,  and  Phila- 
delphia, cause  of  insolvency 
of,  224;  reorganization  of, 
2G6. 

Buffalo,  Rochester,  and  Pitts- 
burgh, equipment  bonds  of, 
86 ;  property  script  dividends 
of,  170. 

Bureaus  of  administration, 
management  of  Dutch  in- 
vestments in  xVmerican  rail- 
roads by,  100. 

Burlington  and  Missouri  River, 
construction  of,  aided  by  l-iie 
Burlington,  75. 

Burlington  and  Southwestern , 
receivership  of,  238-9. 


California,  accounting  require- 
ments in,  193n-4n. 

California  and  Oregon,  con- 
struction contracts  of,  70-1. 

California  and  Texas  railroad 
construction  company,  con- 
struction of  Texas  and  Pa- 
cific by,  03-4. 

Camden  and  Amboy,  invest- 
ment basis  of,  1-2 ;  construc- 
tion of,  by  railroad  company, 
57;  fraudulent  over-issues  of 
securities  by,  105 ;  consolida- 
tion of,  with  New  Jersey 
railroad  as  United  Railroads 
of  New  Jersey,  289. 

Canadian  Pacific,  competition 
of,  as  cause  of  Northern  Pa- 
cific insolvency,  223 ;  control 
of  Atlantic  and  St.  Lawrence 
by,  285. 


Canals,  investment  basis  of, 
0-8 ;  inferiority  of,  to  rail- 
roads on  long  hauls,  11. 

Capital,  definition  and  classi- 
fication of,  34-8 ;  shares  and 
credit  obligations  of,  38-42 ; 
leases  of,  42 ;  appi'opriations 
of,  from  surplus,  42-3 ;  mar- 
ket for  shares  and  for  bonds 
of,  43-4 ;  inadequacy  of,  in 
original  capitalization,  45-6; 
additional  issues  of,  46-9; 
protection  of  corporate  es- 
tate of,  107-28;  as  funds, 
133-8,  100-72.  See  also  Bonds; 
Shares ;  Overcapitalization  ; 
Underwriting. 

Car  trusts,  certificates  of,  82-5 : 
payment  of  instalments  to, 
197 ;  payment  to,  during  re- 
ceivership, 84,  241 ;  as  a  fac- 
tor in  overcapitalization,  335. 

Cassatt,  A.  J.,  as  originator  of, 
community  of  interest  plan, 
278. 

Central  Branch  Union  Pacific, 
loan  of  credit  to,  33. 

Central  Car  company,  equip- 
ment contracts  of,  with  Wis- 
consin Central,  88. 

Central  Military  Tract  railroad, 
consolidation  of,  with  Chi- 
cago and  Aurora  as  Chicago, 
Burlington    and    Qijincy,    274. 

Central  New  England,  con- 
trolled by  the  New  Haven, 
317. 

Central  of  New  Jersey,  inade- 
quacy of  accounts  of,  181  ; 
community  of  interest  and, 
279;  controlled  by  Reading, 
288,  295. 


437 


INDEX 


Central  Ohio,  leased  by  Balti- 
more and  Ohio,  270,  301. 

Central  Pacific,  land  grant  to, 
33 ;  loan  of  credit  to,  33 ;  con- 
struction contracts  of,  09,  221 ; 
coupon  shares  of,  100 ;  better- 
ments of,  140 ;  acquired  by 
Union  Pacific,  288 ;  leased  by 
the  Southern  Pacific  com- 
pany, 30G. 

Central  Railroad  and  Banking 
company  of  Georgia,  reorgan- 
ization of,  259 ;  acquired  by 
Harrinian,  282-3,  287;  con- 
trolled by  Richmond  and 
West  Point  Terminal  Rail- 
way and  "Warehouse  com- 
pany, 309. 

Central  Vermont,  receivership 
of,  236,  241 ;  reorganization 
of  266;  controlled  by  Grand 
Trunli,  284. 

Certificates,  car  trust,  83-5 ;  re- 
ceivers', 243-5 ;  of  beneficial 
interest,  of  voting  trust,  268 ; 
share.     See  Shares. 

Charters  of  railroad,  16-7.  153-4 ; 
of  construction  companies,  62, 
64-5;  of  holding  companies, 
305-16. 

Chesapealce  and  Ohio,  relation 
of,  to  car  trusts,  84 ;  receiver- 
ship of,  235 ;  reoi'ganization 
of,  249,  253 ;  as  acquired  by 
"Big  Four,"  296 ;  community 
of  interest  and,  278 ;  as  part 
of  "Hawley  system,"  296 ;  in- 
terest of,  in  Richmond- Wash- 
ington company,  315-6. 

Chesapealse  and  Ohio  South- 
western, acquired  by  Illinois 
Central,  291. 


Chevalier,  Michel,  on  invest- 
ment basis  of  railroad  con- 
struction in  U.  S.,  13. 

Chicago  and  Alton,  purchase  by, 
of  Chicago  and  Illinois  River, 
291 ;  acquisition  of  Alton  and 
St.  Louis  by,  293;  leases  in 
perpetuity  of,  301 ;  "reor- 
ganization" of,  144,  176,  298, 
337-8 ;  acquired  by  Hawley 
and  the  Moore  brothers,  283, 
298. 

Chicago  and  Atlantic,  construc- 
tion of,  aided  by  New  Yorli, 
Lalie  Erie  and  Western,  73 ; 
receivership  of,  244 ;  reor- 
ganization of,  259 ;  construc- 
tion of,  with  Central  Mili- 
tary Tract  x-ailroad  as  Chi- 
cago, Burlington,  and  Quincy, 
274;  extension  of  Erie  sys- 
tem to  Chicago  by,  276-7. 

Chicago  and  Aurora,  consolida- 
tion of,  with  Central  Military 
Tract  railway  at  Chicago, 
Burlington  and  Quincy,  274. 

Chicago  and  Eastern  Illinois, 
financing  of  bridge  construc- 
tion of,  78;  acquired  by  St. 
Louis  and  San  Francisco,  296  ; 
afliliated  with  "Hawley  sys- 
tem," 283. 

Chicago  and  Erie,  taken  over 
by  the  Erie,  264-5. 

Chicago  and  Milwaukee,  merged 
in  Chicago  and  Northwest- 
ern, 289,  293-4. 

Chicago  and  Northwestern,  as 
successor  to  Chicago,  St.  Paul, 
and  Fond  du  Lac,  258-9; 
shareholders'  rights  in,  47 ; 
extensions    of,    74;    construc- 


438 


INDEX 


tlon  policy  of,  75 ;  community 
of  interest  and,  279 ;  system 
mileage  of,  286-7 ;  sliares 
held  by  Union  Pacific  in,  287, 
316;  merger  of  Galena  and 
Chicago  Union  and  Chi- 
cago and  Milwaukee  in,  289, 
293-4;  merger  of  Beloit  and 
Madison  in,  301 ;  control  of 
Chicago,  Minneapolis,  St. 
Paul,  and  Omaha  by,  297 ;  at- 
tempt of  Moore  brothers  to 
acquire  control  of,  298 ;  tend- 
ency of,  toward  absolute  own- 
ership of  subsidiary  lines, 
299. 

Chicago  and  Illinois  River,  ac- 
quired by  Chicago  and  Alton, 
291. 

Chicago,  Burlington,  and  North- 
ern, construction  of,  aided  by 
the  Burlington,  75. 

Chicago,  Burlington,  and 
Quincy,  consolidation  of,  274 ; 
extensions  of.  75 ;  acquisi- 
tion of  Colorado  Southern  by, 
283;  of  Hannibal  and  St. 
Joseph  by,  296 ;  acquired  by 
Great  Northern  and  Northern 
Pacific,  287-8,  295,  311-2; 
tendency  of.  toward  absolute 
ownership  of  subsidiary  lines, 
299 ;  relation  of,  to  Northern 
Securities   company,   311-2. 

Chicago,  Cincinnati,  and  Louis- 
ville, as  part  of  "Hawley  sys- 
tem," 283. 

Chicago,  Clinton,  and  Dubuque, 
construction  contract  of,  G2-3. 

Chicago.  Clinton,  and  Western, 
receivership  of,  244-5. 

Chicago,     Dubuque,     and     Min- 


nesota, construction  contract 
of,  G2-3;  reorganization  of, 
259. 

Chicago  Great  Western,  inde- 
pendent auditoi's  of,  103 ; 
cause  of  insolvency  of,  343. 

Chicago,  Indianapolis,  and 
Louisville,  as  controlled  by 
Louisville  and  Nashville,  282, 
295. 

Chicago,  Indiana,  and  Southern, 
as  controlled  by  Lake  Shore, 
316. 

Chicago,  Kansas,  and  Nebraska, 
construction  of,  aided  by 
Chicago,  Rock  Island,  and 
Pacific,  74. 

Chicago,  Milwaukee,  and  Puget 
Sound,  financed  by  Chicago, 
Milwaukee,  and  St.  Paul,  76-7. 

Chicago,  Milwaukee,  and  St. 
Paul,  financing  of  Chicago, 
Milwaukee,  and  Puget  Sound 
by,  76-7,  281;  betterment 
policy  of,  146 ;  community 
of  interest  and,  279-80; 
shares  held  by  Union 
Pacific  in,  287,  316;  merger 
of  Milwaukee  and  Northern 
in,  299 ;  of  Western  Union 
railroad  in,  301 ;  attempt  of 
Great  Northern  and  North- 
ern Pacific  to  acquire  con- 
trol of,  311. 

Chicago,  Minneapolis,  St.  Paul, 
and  Omaha,  minority  control 
of,  held  by  Chicago  and 
Northwestern,  balance  of 
power  in,  held  by  F.  W.  Van- 
derbilt,  297. 

Chicago,  Rock  Island  and  Pa- 
cific   railroad    company,    con- 


439 


INDEX 


trol  of,  by  Chicago,  Rock 
Island,  and  Pacific  railway, 
295-6,  314. 

Chicago,  Rock  Island,  and  Pa- 
cific railway,  extensions  of, 
74;  construction  policy  of, 
74;  acquired  by  Moore  broth- 
ers, 290,  295-6,  298,  314;  ac- 
quisition of  Choctaw,  Okla- 
homa, and  Gulf  by.  295  ;  lease 
of  Keokuk  and  Des  Moines 
and  Des  Moines  and  Fort 
Dodge  by,  301  ;  controlled  by 
Chicago,  Rock  Island  and  Pa- 
cific railroad  company,  295-6, 
298,  314. 

Chicago,  St.  Paul,  and  Fond  du 
Lac,  land  bonds  of,  56 ;  re- 
organization of,  258. 

Choctaw,  Oklahoma,  and  Gulf, 
as  controlled  by  Chicago,  Rock 
Island,  and  Pacific,  295. 

Cincinnati,  Hamilton,  and  Day- 
ton, as  constructed  on  share 
basis,  52 ;  joint  control  of 
Cincinnati,  New  Orleans,  and 
Texas  Pacific  by,  314-5. 

Cincinnati,  New  Orleans,  and 
Texas  Pacific,  lease  of  Cin- 
cinnati Southern  by,  301-2 ; 
joint  control  of,  by  Cincin- 
nati, Hamilton,  and  Dayton 
and  the  Southern,  314-5. 

Cincinnati  Southern,  leased 
by  Cincinnati,  New  Orleans, 
and  Texas  Pacific,  301-2. 

Cincinnati,  Washington,  and 
Baltimore,  reorganization  of, 
259,  266. 

Claims  for  loss,  damage,  and 
injury,  158-9,  186,   195. 

Cleveland,   Cincinnati,   Chicago, 


and  St.  Louis,  community  of 
interest  and,  278 ;  control  of 
Chesapeake  and  Ohio  by,  296 ; 
controlled  by  Lake  Shore, 
297,  316. 

Coal  and  Coke  railway,  con- 
struction of,  by  railway  com- 
pany, 57. 

Colorado  Midland,  reorganiza- 
tion of,  256,  263,  265-6;  con- 
trol of,  surrendered  by  Atchi- 
son, 2(>4  ;  controlled  by  Denver 
and  Rio  Grande  and  Colo- 
rado Southern.  293. 

Colorado  Southern,  acquired  by 
the  Burlington,  287 ;  joint 
control  of  Colorado  Midland 
by,  293. 

Coltou,  D.  D.,  on  management 
of  Southern  I'acific,  306. 

Columbia  and  Puget  Sound, 
financed  by  Chicago,  Milwau- 
kee, and  St.  Paul,  77. 

Columbia,  Piqua,  and  Indiana, 
construction  of,  by  receiver, 
240. 

Columbia,  Chicago,  and  Indiana 
Central,  leased  by  Pittsburgh, 
Cincinnati,  and  St.  Louis,  276. 

Community  of  interest,  278-83, 
318. 

Companies  acts,  in  Great 
Britain,  112;  as  protection  of 
capital,  119. 

Comptroller.     Sec  Auditor. 

Concord  railroad,  consolidation 
of,  285-6. 

Connecticut  and  Passumpsic 
Rivers,  consolidation  of,  285-6. 

Consolidated  railway  company, 
merged  in  the  New  Haven, 
316-7. 


440 


INDEX 


Consolidation,  definition  of, 
270;  early  period  of,  272-5; 
trunk  line  development  of, 
275-7  ;  effect  of  Anti-trust  Act 
upon,  27(7-8 ;  community  of 
interest  and,  278-9 ;  concen- 
tration of  control  by,  279-83 ; 
Huntington  plan  for  single 
company  by,  283-4 ;  tendency 
toward,  in  New  England, 
284-6 ;  similar  tendency  to- 
ward, elsewhere,  286-7 ;  mo- 
tives in,  287-90 ;  direct  union, 
form  of,  290 ;  merger  form 
of,  290-1 ;  conveyance  form 
of,  291 ;  share  ownership, 
in,  291-9 ;  lease,  as  a  means 
of,  299-302;  Beach's  plan 
for  trust  and,  303-5;  holding 
companies,  as  a  means  of, 
305-17 ;  Cook's  plan  for  single 
holding  company,  and,  317-8 ; 
results  of,  318-21 ;  relation  of, 
to  overcapitalization,  289-90, 
336-7 ;  bibliography  on, 
367. 

Construction,  definition  of,  50 ; 
share  basis  in,  50-4 ;  credit 
basis  in,  54-6 ;  by  railroad 
company,  57-8 ;  by  construc- 
tion company,  58-72 ;  exten- 
sions in,  72-7,  172-3 ;  bridges 
in,  77-8,  173;  terminals  in,  78- 
80,  173 ;  capitalized  funds 
and,  133-4,  172-3,  265;  receiv- 
ers as  builders  and,  240 ;  rela- 
tion of,  to  overcapitalization, 
334-5  ;  bibliography  on,  359-()0. 

Contract  and  Finance  company. 
Central  Pacific  and  other 
railroads,  constructed  by, 
70-1. 


Conveyance,  as  means  of  con- 
solidation, 272,  291. 

Cook,  W.  W.,  plan  of,  for  a 
single  railroad  holding  com- 
pany, 317-8. 

Cooke,  J.,  underwriting  syndi- 
cates and,  23-4. 

Coupons,  to  represent  interest, 
99 ;  to  represent  dividends, 
100  ;  redemption  of,  99. 

Credit  Mobilier,  construction  of 
Union  Pacific  and,  64-70; 
bibliography  on,  359-60. 

Crocker,  Charles,  connection  of, 
with  construction  of  Pacific 
railroads.  70-1 ;  organization 
of  the  Southern  Pacific  com- 
pany and,  305-7. 

Crocker,  C,  and  company.  Cen- 
tral Pacific  construction  con- 
tracts  and,    70. 

Crocker,  E.  B.,  connection  of, 
with  construction  of  Pacific 
railroads,  70,  305-7. 

Crowell,  J.  F.,  on  early  re- 
organizations, 226 ;  on  trus- 
teeship, the  forerunner  of  re- 
ceivership, 233. 

Cunningham,  W.  J.,  on  "scien- 
tific management"  of  rail- 
roads, 103-4. 

Davis.  J.  P.,  on  security  of  rail- 
road bonds,  55 ;  on  specula- 
tive construction,  60. 

Dayton,  Fort  Wayne,  and  Chi- 
cago, receivership,  244. 

Delaware  and  Hudson,  better- 
jnent  policy  of,  146 ;  com- 
munity of  interest  and,  279 ; 
merger  of  New  York  and 
Canada  with,  299. 


441 


INDEX 


Delaware,  Lackawanna,  and 
Western,  constructed  on  sbare 
basis,  52 ;  betterment  policy 
of,  146 ;  property  script  divi- 
dend and,  ITO;  community  of 
interest  and,  279 ;  leases  Mor- 
ris and  Essex,  288. 

Delaware,  Lackawanna,  and 
Western  Coal  company,  17G. 

Denver  and  Rio  Grande,  op- 
poses Denver,  Nortbwestern, 
and  Pacific  project,  29-30; 
finances  of  Western  Pacific 
railway,  75-6  ;  merger  of,  with 
Rio  Grande  Western,  7(5,  294 ; 
joint  control  of  Colorado 
Midland  by,  293 ;  independent 
auditors  and,  103 ;  receiver- 
ship of,  246 ;  reorganization 
of,  264-5,  270;  community  of 
interest  and,  279-80;  family 
control  in,  297,  316 ;  tendency 
of,  toward  absolute  owner- 
ship of  subsidiary  lines,  299 ; 
leased  by  Atchison,  302. 

Denver,  Northwestern,  and  Pa- 
cific, financing  of  construc- 
tion of,  29-30;  receivership 
of,  30. 

Denver  Pacific,  merged  in 
Union  Pacific,  291. 

Denver  Railway  Securities 
company,  Denver,  North- 
western, and  Pacific,  financ- 
ed by,  30 ;  receivership  of, 
30. 

Depreciation,  of  equipment,  89- 
94;  of  property  in  general, 
130-1,  170-1. 

Des  Moines  and  Fort  Dodge, 
leased  by  Chicago,  Rock 
Island,  and  Pacific,  301. 


Detroit,  Lansing,  and  Northern, 
reorganization  of,  258. 

Detroit  River  Tunnel  company, 
financed  by  Michigan  Central, 
78. 

Dillon,  Sidney,  connection  of, 
with  Credit  Mobilier,  67;  on 
the  public  interest  in  over- 
capitalization, 339n. 

Dividends,  as  inducement  to  in- 
vestors, 21 ;  as  profit  of  bank- 
er as  financial  agent,  23 ;  de- 
claration of,  34-40,  110-1, 
175-6,  197-9,  216,  218;  on  pre- 
ferred shares,  40,  262 ;  pay- 
ment of,  98-101 ;  equalization 
of,  174-5 ;  in  property  script, 
175-6;  in  shares,  337-9.  See 
also  Shares. 

Dominion  Land  company.  See 
California  and  Texas  Rail- 
way Construction  company. 

Duluth,  Watertown,  and  Pa- 
cific acquired  by  Great  North- 
ern, 307-8. 

Durant,  T.  C,  head  of  Credit 
Mobilier,  65-8. 

East  Tennessee,  Virginia,  and 
Georgia,  reorganization  of, 
259-61  ;  controlled  by  the 
Pennsylvania,  308 ;  controlled 
by  Richmond  and  West 
Point  Terminal  Railway  and 
Warehouse  company,  308-9 ; 
acquisition  of  control  of 
Alabama  Great  Southern  by, 
315. 

Eastern  railroad,  constructed 
on  share  basis,  51 ;  inade- 
quacy of  accounts  of,  181 ; 
consolidation  of,  273,  284-6. 


442 


INDEX 


Eastern  of  Minnesota,  acquired 
by  Great  Northern.  307-8. 

Eminent  domain,  16,  54,  139, 
299. 

Employees,  insurance,  pension, 
and  provident  funds  for, 
136-7,  159;  welfare  of,  158, 
172 ;  wage  distribution  for, 
over  operating  accounts,  192 ; 
receivership  proposed  in  case 
of  protracted  labor  disputes 
with,  237 ;  wages  of,  during 
receivership.  242-3.  i^ee  also 
Labor ;  Payrolls. 

English  Association  of  Ameri- 
can Bond  and  Share  Holders, 
management  by,  of  Invest- 
ments in  American  railroads, 
10(>1. 

Equipment,  definition  of,  81 ; 
made  in  railroad  shops, 
81 ;  purchased  on  contract. 
81-2 ;  by  car  trusts.  82-5,  197. 
241,  335  :  leased.  87-8  ;  by  pri- 
vate car  lines,  88-9 ;  repairs 
and  renewals  in.  89-94 ;  capi- 
talized funds  and,  134,  172-3, 
205;  bibliography  on,  300. 

Equipment  bonds.  85-7. 

Erdman  act,  settlement  of  labor 
disputes   under,    154. 

Erie,  extension  of,  to  Chicago, 
270-7;  early  mileage  of,  280; 
short  term  notes  and,  48 ; 
shares  of,  held  by  Union  Pa- 
cific. 287  ;  tendency  of,  toward 
absolute  ownership  of  sub- 
sidiary lines.  299 ;  overcapi- 
talization of.  330. 

European  and  North  American 
railway,  consolidation  of, 
285-6. 


European  investments,  in  gen- 
eral, 24,  29-30;  Dutch  han- 
dling companies  and,  100; 
British  investment  organiza- 
tions and,  98-102 ;  protected 
by  independent  auditors,  103- 
4,  116-8:  Dutch  interest  in 
Kansas  City  Southern.  298. 

Excelsior  Enterprise  company, 
310. 

Fall  River  railroad,  consolida- 
tion of,  274. 

Fall  River  Branch  railroad, 
merged  in  Fall  River  rail- 
road, 274. 

Financial  agent,  issuance  of 
securities  by,  20-1. 

Fiscal  agent,  position  of.  in 
financial   organization.    99. 

Fisk,  J.,  Jr.,  responsibility  of, 
for  Erie  insolvency,  221-2. 

Foreclosure,  termination  of  re- 
ceivership and,  240 ;  when  un- 
necessary, 248-9;  "strict," 
250 ;  bondholders  as  bidders 
at,  255-0 ;  relation  of,  to  con- 
solidation, 291. 

Fort  Wayne  and  Chicago  con- 
struction, aided  by  the  Penn- 
sylvania. 73;  consolidation 
of,  with  Ohio  and  Indiana 
and  Ohio  and  Pennsylvania  as 
Pittsburgh,  Fort  Wayne,  and 
Chicago,  274. 

Fort  Wayne,  Muncie,  and  Cin- 
cinnati, receivership  of,  238 ; 
reorganization  of.  259. 

Fort  Worth  and  Denver  City, 
reorganization  of,  249. 

Frick,  II.  C,  largest  shareholder 
in   the  Pennsylvania,  280. 


443 


INDEX 


Funds,  as  working  capital,  133, 
173-4;  in  construction  and 
equipment,  134,  172-3;  in 
additions  and  betterments, 
134-5,  171-2;  sinking,  J35-6, 
174,  197 ;  employees'  insur- 
ance, pension,  and  provident, 
136-7 ;   insurance,   138,   170. 

Galena  and  Chicago  Union, 
merger  of,  with  Mississippi 
and  Rock  River  Junction, 
291 ;  merged  in  Chicago  and 
Northwestern,  289. 

Gates,  J.  W.,  acquisition  of 
Louisville  and  Nashville  by, 
295,  298. 

Georgia,  regulation  of  issuance 
of  securities  in,  348. 

Georgia  company,  a  non-opera t 
ing  holding  company,  con- 
trolled by  Richmond  and 
West  Point  Terminal  Rail- 
way and  Warehouse  com- 
pany, 309. 

Georgia,  Memphis  and  Charles- 
ton, controlled  by  the  Penn- 
sylania,  308 ;  controlled  by 
Richmond  and  West  Point 
Terminal  Railway  and  Ware- 
house company,  308. 

Gilman,  Clinton,  and  Spring- 
field, construction  contract 
of,  62. 

Gould,  G.  J.,  opposition  of,  to 
Denver,  Northwestern,  and 
Pacific  project,  29-30;  com- 
munity of  interest  of,  with 
Harriman,  279 ;  Banking  affil- 
iations of,  279-80;  partial 
control  of,  over  Southwestern 
territory,  282-3  ;  acquisition  of 


Western  Maryland  by,  283, 
288,  296 ;  system  mileage 
of,  287;  Chicago  and  Alton 
"deal"  and,  144,  170,  298, 
337-8. 

Gould,  J.,  responsibility  of,  for 
Erie  insolvency,  221-2 ;  as 
cause  of  receivership  of  Mis- 
souri. Kansas,  and  Texas, 
249 ;  connection  of,  in  sale  of 
Hannibal  and  St.  Joseph  to 
the   Burlington,   290. 

Grand  Rapids  and  Indiana, 
construction  of,  aided  by  the 
Pennsylvania,  73. 

Grand  Trunk,  application  for 
receivers  of  Central  Vermont 
by,  236 ;  assumes  control  of 
Atlantic  and  St.  Lawrence 
and  of  Central  Vermont, 
283-5. 

Great  Northern,  extensions  of, 
75  ;  betterment  policy  of,  146  ; 
property  script  dividend  of, 
176;  competition  with,  as 
cause  of  Northern  Pacific  in- 
solvency, 223 ;  in  joint  con- 
trol of  the  Burlington,  287-8. 
295 ;  an  operating  holding 
company,  307-8 ;  leases  St. 
Paul,  Minneapolis,  and  Mani- 
toba, 307 ;  acquires  Mon- 
tana Central,  Duluth,  Water- 
town,  and  Pacific,  Wilmar 
and  Sioux  Falls,  and  Eastern 
of  Minnesota.  307 ;  acquires 
fee  title  to  subsidiary  lines, 
308 ;  relation  of,  to  Northern 
Securities    company,    311-3. 

Greene,  T.  L.,  on  security  of 
railroad  bonds.  261 ;  on  effect 
of  overcapitalization  on  rates, 


444 


INDEX 


340-2;     public     attitude     of, 
toward  overcapitalization  and 
large  dividends,  344-5. 
Greenville     and     Miami,     con- 
struction contract  of,  58-9. 

Hadley,  A.  T.,  on  railroad 
trusts,  305 ;  on  effect  of  over- 
capitalization on  rates,  339 ; 
on  evils  of  overcapitalization, 
341. 

Handling  companies,  manage- 
ment of  Dutch  investments 
in  American  railroads  by,  100. 

Hannibal  and  St.  Joseph,  ac- 
quired by  the  Burlington, 
296. 

Harriman,  E.  H.,  opposition  of, 
to  Denver,  Northwestern,  and 
Pacific  project,  29-30 ;  better- 
ment policy  of,  139-40 ;  com- 
munity of  interest  of,  with  G. 
J.  Gould,  279;  extension  of 
influence  of,  into  the  North- 
west and  into  the  South, 
282-3 ;  consolidation  of  traffic 
organizations  of  controlled 
lines  by  investment  by,  in  rail- 
road shares  "  for  income," 
292 ;  definiti(!)n  of  minority 
control  by,  297 ;  part  of,  in 
Chicago  and  Alton  "  deal," 
144,  176,  298,  337-8 ;  loss  of,  of 
Chicago  and  Alton  and  of 
Kansas  City  Southern,  298; 
connection  of,  with  Northern 
Securities  company,  311-3. 

Harrisburg  and  Lancaster, 
leased  by  the  Pennsylvania, 
300. 

Hartford  and  New  Haven,  in- 
vestment basis  of,   1. 


Hartford,  Providence,  and 
Fishkill,  operation  of,  by 
trustees,   229-30. 

Hatfield,  H.  R.,  on  surplus, 
168-9. 

Hawley,  E.,  acquisition  of 
Chicago  and  Alton  by,  298. 

"Hawley  system."  the,  283. 

Henderson  Bridge  and  Railroad 
company,  financed  by  Louis- 
ville and  Nashville,  78. 

Hepburn  Act,  "  commodities " 
clause  in,  17G ;  accounting  re- 
quirements of,  182-3,  192-3; 
reporting  requirements  of, 
144,  211-22,  292. 

Hill,  J.  J.,  finances  Great  North- 
ern, 29 ;  banking  affiliations 
of,  280,  282;  partial  control 
of,  over  Northwestern  terri- 
tory, 282 ;  system  mileage  of, 
287 ;  connection  of,  with 
Northern  Securities  company, 
311-3. 

Hoar,  G.  F.,  on  ethics  of  Credit 
Mobilier,  69-70. 

Hocking  Valley,  part  of  "  Haw- 
ley system  "  in,  283. 

Holding  companies,  as  aids  to 
consolidation,  305-lG ;  func- 
tion of,  performed  by  rail- 
road companies,  316-7 ;  a 
single  company  proposed  in, 
317-8;  effect  of,  on  public, 
320 ;  overcapitalization  of, 
337. 

Holding  companies  (individu- 
al) :  Alabama,  New  Orleans, 
Texas  and  Pacific  Junction 
railways,  314-5 ;  Atlantic 
Coast  Line,  311 ;  Boston 
Railroad,        317;        Chicago. 


445 


INDEX 


Rock  Island,  and  Pacific  rail- 
road, 295-6,  314  ;  Denver  Rail- 
way Securities,  30 ;  Georgia, 
309;  Great  Northern  railway, 
307-8;  Michigan  Securities, 
315 ;  Northern  Securities, 
311-3;  Oregon  and  Transcon- 
tinental, 309-10;  Pennsyl- 
vania, 234,  278,  305 ;  Railroad 
Securities,  311;  Reading,  88, 
279,  295,  297,  310,  337;  Rock 
Island,  283,  290,  295-6,  313-4, 
333,  337 ;  Richmond  and  West 
Point  Terminal  Railway  and 
Warehouse,  308-9;  Richmond- 
Washington,  315-6 ;  Seaboard, 
337;  Southern  Pacific,  305-7; 
Southern  Pacific  railroad, 
306;  Southern  Railway  Se- 
curity, 308 ;  Southwestern 
Construction,  315;  Wisconsin 
Central,  307. 

Hopkins,  M.,  connection  of,  with 
construction  of  Pacific  rail- 
roads, 70-1 ;  shares  of,  taken 
over  by  the  Southern  Pacific 
company,  306. 

Housatonic  railroad,  consolida- 
tion of,  285-6. 

Houston  and  Texas  Central,  re- 
organization, 254,  257. 

Hoxie,  construction  contract  of, 
with  Union  Pacific,  65-6. 

Hudson  River  railroad,  con- 
solidation of,  with  New  York 
Central,  276,  290. 

Huntington,  C.  P.,  connection 
of,  with  construction  of  Pa- 
cific railroads,  70-1 ;  better- 
ment policy  of,  147 ;  proposal 
of  a  single  railroad  company 
by,  283-4;  in  receivership  of 


Chesapeake  and  Ohio,  235; 
in  sale  of  Chesapeake  and 
Ohio  to  "Big  Four,"  296;  in 
organization  of  the  Southern 
Pacific   company,   305-7. 

Illinois  Central,  land  grant  to, 
33,  56;  extensions  of,  73-4; 
finances  bridge  construction, 
78 ;  early  mileage  record  of, 
286 ;  purchases  Cecilia  branch 
of  Louisville  and  Nashville 
and  of  Chesapeake  and  Ohio 
Southwestern,  291 ;  acquired 
by  Union  Pacific.  282,  287, 
311 ;  shares  of,  held  by  the 
Railroad  Securities  com- 
pany, 311. 

Income  account.  See  Accounts ; 
Surplus. 

Incorporation.     See  Charters. 

Indianapolis  and  Bellefontaine, 
exchange  of  shares  by,  for 
land,  labor,  and  materials, 
53. 

Indianapolis,  Bloomington,  and 
Western,  receivership  of,  234. 

Indianapolis,  Cincinnati  and 
Lafayette,  cause  of  insolv- 
ency of,  220-1. 

Indianapolis,  Pittsburgh,  and 
Cleveland,  consolidation  of, 
with  Bellefontaine  and  Indi- 
ana, 274-5. 

Insolvency,  definition  of,  215-7 ; 
causes  of :  heavy  fixed  charges, 
217-9 ;  excessive  mileage,  219- 
20 ;  inferior  coJistruction,  220 ; 
branch  linos,  220-1 ;  fraud  and 
inadequate  reports,  221-2 ; 
competition,  222-3 ;  legislation, 
223;  floating  debt,  the  imme- 


446 


INDEX 


diate  cause  of,  41-2,  48,  223-4 ; 
relation  of,  to  general  busi- 
ness conditions,  224-5 ;  inade- 
quacy of  early  reorganiza- 
tions and,  225-6.  i^ee  also 
Recelversbip. 

Insurance  funds,  employees, 
130-7;  property,  138. 

International  and  Great  North- 
ern, finances  bridge  construc- 
tion, 77 ;  reorganization  of, 
251,  2G3;  family  control  of, 
293. 

Interstate  Commerce  Commis- 
sion, on  equipment  deprecia- 
tion, 91-4 ;  on  balance  sheet, 
122-8,  200-4;  on  additions 
and  betterments,  147-8 ;  on 
reports,  182-3,  211-2;  on  op- 
erating expenses,  192-5 ;  on 
operating  revenues,  195-7 ;  on 
income  and  profit  and  loss, 
197-9 ;  on  outside  operations, 
198n-9n ;  on  road  and  equip- 
ment, 201  n  ;  "  control  "  de- 
fined by,  281n-2n ;  on  consoli- 
dation, 28G ;  on  railroad  hold- 
ings of  railroad  securities. 
292-3 ;  on  proposed  control 
over  issuance  of  securities, 
349-51. 

Iowa,  regulation  of  issuance  of 
securities  in,  348. 

Iowa  and  Mississippi  River 
Construction  company,  con- 
struction by,  of  Chicago, 
Dubuque,  and  Minnesota  and 
of  Chicago,  Clinton,  and  Du- 
buque, (i2-3. 

Iowa  Central,  part  of  "  Hawley 
system,"  283. 

Investment     trust     companies. 


management  of  British  in- 
vestments in  American  rail- 
roads by,  101-2. 

Jacksonville,  Pensacola  and  Mo- 
bile, receivership  of,  229. 

Jenkins,  M.,  partial  control  of 
the  Southern  territory  by, 
282. 

Joint  Traffic  Association  case, 
effect  of,  on  consolidation, 
277-9. 

Kansas,  regulation  of  issuance 
of  securities  in,  348. 

Kansas  and  Nebraska  Land 
company,  62. 

Kansas  City  and  Memphis  Rail- 
way and  Bridge  comi)any,  fi- 
nanced by  St.  Louis  and  San 
Francisco,  78. 

Kansas  City  and  Pacific,  con- 
trolled by  Missouri,  Kansas, 
and  Texas,  240-1,   294. 

Kansas  City,  Fort  Scott  and 
Memphis,  equipment  com- 
pany bonds  of,  86-7. 

Kansas  City  Southern,  acquired 
by  Sielcken,  298. 

Kansas  Pacific,  loan  of  credit 
to,  33 ;  cause  of  insolvency  of, 
220-1 ;  merged  in  Union  Pa- 
cific,  291. 

Kentucky  Central,  receivership 
of,  241,  246. 

Keokuk  and  Des  Moines,  leased 
by  Chicago,  Rock  Island,  and 
Pacific,  301. 

Kilbourn,  B.,  land  speculation 
of,  61-2. 

Knapp,  M.  A.,  on  effect  of  over- 
capitalization on  rates,  339. 


447 


INDEX 


Knox,  P.  C,  on  national  regu- 
lation of  issuance  of  securi- 
ties, 350-1. 

Kubn,  Loeb  and  company, 
financial  agent  of  Union  Pa- 
cific, 25 ;  railroad  affiliations 
of,  280 ;  control  of  over  South- 
ern Pacific,  295. 

Labor,  in  payment  of  share 
subscriptions,  31,  52-3 ;  as 
factor  in  operating  economies, 
154,  156,  158-9,  161-5.  See 
also  Employees ;  Payrolls. 

La  Crosse  and  Milwaukee, 
cause  of  insolvency  of,  222. 

Lake  Erie  and  Western,  con- 
trolled by  Lake  Shore,  316. 

Lake  Shore  and  Michigan 
Southern,  consolidation  of, 
276,  336;  relation  of,  to  re- 
ceivership of  "  Nickel  Plate," 
221 ;  acquisition  by,  of  "  Nick- 
el Plate,"  277 ;  family  con- 
trol of,  293;  controlled  by 
New  York  Central,  295,  319; 
in  joint  control  of  the  Read- 
ing, 297 ;  control  of  "Big 
Four"  by,  297;  used  as  New 
York  Central  holding  com- 
pany, 316. 

Lake  Superior  company.  Great 
Northern  ore  certificates  and, 
176. 

Lake  Superior  and  Puget  Sound 
Land  company,  relation  of, 
to  Northern  Pacific,  62. 

Land,  in  payment  of  share  sub- 
scriptions, 31,  52-3 ;  as  basis 
of   bond  issues,  56. 

Land  companies,  as  speculative 
adjuncts  of  railroads,  62. 


Land  grants,  state,  32 ;  national, 
33;  sold  to  attract  settlers, 
151. 

Leases,  as  capital  obligations, 
38,  42,  216;  as  cause  of  in- 
solvency, 217-8 ;  as  means  of 
consolidation,  272,  299-302 ; 
equipment,    82-6. 

Leavenworth,  Lawrence,  and 
Gulf,  receivership  of,  238. 

Lehigh  Valley  car  trust,  84; 
community  of  interest  and, 
279. 

Liabilities,  as  capital  obliga- 
tions. 34-6,  38,  322;  account- 
ing requirements  in,  of  Brit- 
ish law,  112-6,  120.  See  also 
Insolvency;  Overcapitaliza- 
tion. 

Lincoln,  W.,  on  investment  basis 
of  Boston  and  Providence,  8-9. 

Logansport,  Crawfordsville,  and 
South  Western,  construction 
contract  of,  62. 

Long  Island  railroad,  physical 
connection  of,  with  the  Penn- 
sylvania, 152-3 ;  stability  of 
earning  power  of,  225. 

Lottery  privilege,  as  aid  to  rail- 
roads, 53-4. 

Louisa  railroad,  use  of  personal 
credit  of  directors  of,  52. 

Louisville  and  Nashville,  financ- 
ing of  terminals  of,  79 ;  prop- 
erty script  dividend  of,  176 ; 
acquired  by  Gates  and  turned 
over  to  Atlantic  Coast  Line, 
282,  295;  control  of  Chicago, 
Indianapolis,  and  Louisville 
by,  282,  295;  sale  of  Cecilia 
branch  by,  to  Illinois  Central, 
291. 


448 


INDEX 


Louisville    Property    company, 

176. 
Louisiana,  subsidy  policy  in,  32. 

Macon  and  Brunswick,  receiver- 
ship of,  229. 

Mahoning  Investment  com- 
pany, 176. 

Maine,  regulation  of  issuance  of 
securities  in,  346. 

Maine  Central,  consolidation  of, 
284-6. 

Maintenance,  definition  of,  129- 
30 ;  repairs  and  replacements 
in,  130;  depreciation  in, 
130-1 ;  of  subsidiary  proper- 
ties, 131-2;  of  funds,  132-8; 
surcharged  accounts  in, 
142-5. 

Management,  financial  organiza- 
tion in,  95-100 ;  protection  of 
capital  in,  107-28;  "scien- 
tific," 161-4 ;  directors'  re- 
sponsibility  in,   165. 

Marietta  and  Cincinnati,  con- 
struction of,  aided  by  the 
Pennsylvania,  73. 

Maryland,  gives  aid  to  Balti- 
more and  Ohio,  31-2  ;  account- 
ing requirements  in,  193n-4n ; 
regulation  of  issuance  of  se- 
curities in,  331n,  348. 

Massachusetts,  gives  aid  to 
Western  railroad,  31-2  ;  extent 
of  railroad  aid  in,  32 ; 
accounting  requirements  in, 
182,  193n ;  regulation  of  issu- 
ance of  securities  in,  331n, 
346-7. 

MaysviUe  and  Lexington,  241. 

Meade,  E.  S.,  on  security  of  in- 
come bonds,  262. 


Meetings,  shareholders',  103-4, 
267-8,  296-7. 

Memphis  and  Charleston,  con- 
trolled by  the  Pennsylvania, 
308;  controlled  by  Richmond 
and  West  Point  Terminal 
Railway  and  Warehouse  com- 
pany, 308-9. 

Meyer,  B.  H.,  on  Northern  Se- 
curities case,  312-3. 

Michigan,  railroad  appraisal  in, 
329. 

Michigan  Central,  finances  De- 
troit river  tunnel,  78 ;  control 
of,  acquired  by  W.  H.  Van- 
derbilt,  298 ;  family  control 
of,  293 ;  controlled  by  New 
York  Central,  295. 

Michigan  Securities  company,  a 
holding  company,  controlled 
by  Cincinnati,  Hamilton,  and 
Dayton,  315. 

Middleborough  railroad,  merged 
in  Fall  River  railroad,  274. 

Milwaukee  and  Mississippi,  con- 
struction of,  61-2. 

Milwaukee  and  Northern, 
merged  in  Chicago,  Milwau- 
kee, and  St.  Paul,  299. 

Milwaukee  and  St.  Paul,  early 
mileage  of,  286. 

Minneapolis  and  St.  Cloud,  fore- 
runner of  Great  Northern, 
307. 

Minneapolis  and  St.  Louis, 
causes  of  insolvency  of,  223 ; 
part  of  "  Hawley  system  "  in, 
283 ;  overcapitalization  of, 
333. 

Minnesota,  accounting  require- 
ments in,  193n ;  railroad  ap- 
praisals in,  329. 


30 


449 


INDEX 


Minnesota  and  Lake  Winnebago, 
controlled  by  Wisconsin  Cen- 
tral, 307. 

Mississippi  and  Rock  River 
Junction,  merged  in  Galena 
and  Chicago  Union,  291. 

Missouri,  Kansas,  and  Texas, 
finances  bridge-construction, 
78  ;  inadequacy  of  reports  and 
insolvency  of,  222 ;  construc- 
tion of,  by  receivers,  240 ; 
lease  of,  by  receivers,  240-1 ; 
reorganization  of,  240,  250. 
2G3,  2G8  ;  part  of  "  Hawley  sys- 
tem" in,  283;  control  of  Kan- 
sas City  and  Pacific  by,  294. 

Missouri  Pacific,  finances 
bridge  construction,  78 ;  rela- 
tion of,  to  receivership  of 
Missouri,  Kansas,  and  Texas, 
249 ;  community  of  interest 
and,  280 ;  family  control  of, 
293,  297 ;  tendency  of,  toward 
absolute  ownership  of  sub- 
sidiary lines,  299 ;  used  as 
holding  company  of  Gould 
system,  316. 

Missouri  River,  Fort  Scott,  and 
Gulf,   238. 

Mobile  and  Montgomery,  cause 
of  insolvency  of,  223. 

Mobile  and  Ohio,  land  grant  to, 
33,  35 ;  finances  Mobile  docks, 
79;  controlled  by  the  South- 
ern, 282,  295. 

Mobile  Dock  company,  financed 
by  Mobile  and  Ohio,  79. 

Moffat,  D.  H.,  finances  Denver, 
Northwestern,  and  Pacific, 
29-30. 

Monopoly  privileges,  as  aids  to 
railroads,  17. 


Montana  Central,  acquired  by 
Great  Northern,  307-8. 

Moore,  W.  H.,  and  J.  H.,  bank- 
ing aSiliation  of,  280 ;  posi- 
tion of,  among  railroad  inter- 
ests, 283 ;  attempt  to  acquire 
control  of  Chicago  and  North- 
western, 298 ;  create  Rock 
Island  system,  290,  295-0, 
298,  313-4;  acquire  joint  con- 
trol of  Chicago  and  Alton, 
298. 

Morgan.  J.  P.,  railroad  affilia- 
tions of,  280;  connection  of 
with  Northern  Securities  com- 
pany, 312. 

Morgan,  J.  P.,  and  company,  re- 
organizations of,  253,  270-1 ; 
dominant  in  Southern  terri- 
tory, 282 ;  acquire  Louisville 
and  Nashville,  295. 

Morgan  Improvement  company, 
constructs  Gilman,  Clinton, 
and  Springfield,  62. 

Morgan's  Louisiana  and  Texas 
Railroad  and  Steamship  com- 
pany, controlled  by  Southern 
Pacific,  287-8. 

Morris  and  Essex,  leased  by 
Delaware,  Lackawanna,  and 
Western,  288. 

Mortgages,  farm,  in  payment  of 
share  subscriptions,  53;  rail- 
road.    See  Bonds. 

Nashville,  Chattanooga,  and 
St.  Louis,  controlled  by 
Louisville  and  Nashville, 
282. 

National  company,  310. 

Naugatuck  railroad,  "  Schuy- 
ler frauds  "  and,  105. 


450 


INDEX 


Nebraska,  accounting  require- 
ments in,  193n ;  regulation  of 
issuance  of  securities  in,  348. 

New  Hampshire,  accounting  re- 
quirements in,  193n-4n ;  regu- 
lation of  issuance  of  securi- 
ties in,  346,  348. 

New  Haven  and  Northampton, 
"  Schuyler  frauds  "  in,  105  ; 
consolidation  of,  285-6. 

New  Jersey,  transit  duty  on  in- 
terstate passengers  in,  275 ; 
accounting  requirements  in, 
193n-4n ;  regulation  of  issu- 
ance of  securities  in,  348. 

New  Jersey  railroad,  construc- 
tion of,  on  share  basis,  52 ; 
acquired  by  Camden  and  Am- 
boy  and  merged  in  United 
Railroads  of  New  Jersey,  289. 

New  London  Northern,  leased 
to  Central  Vermont,  241. 

New  Orleans  and  Northeastern, 
acquired  by  Alabama  Great 
Southern,  315. 

New  Orleans  Terminal  com- 
pany, financed  by  St.  Louis 
and  San  Francisco  and  the 
Southern,  80. 

New  York  state,  gives  aid  to 
New  York  and  Erie,  31-2 ;  ex- 
tent of  railroad  aid  in,  32; 
accounting  requirements  in, 
182,  193n-4n  ;  regulation  of  is- 
suance of  securities  in,  331n, 
348. 

N'ew  York  and  Canada,  merged 
in  Delaware  and  Hudson, 
299. 

New  York  and  Erie,  subsidized 
by  New  York,  31-2 ;  construc- 
tion contracts  of,  59;  terminal 


of,  79,  275 ;  cause  of  receiver- 
ship of,  222. 

New  York  and  Harlem,  con- 
trolled by  New  York  Central, 
79,  288;  "Schuyler  frauds" 
in,  105-6. 

New  York  and  New  England, 
causes  of  insolvency  of,  79, 
219  ;  receivership  of,  236,  246  ; 
reorganization  of,  257 ;  con- 
solidation of,  285-6 ;  controlled 
by  the  New  Haven,  289. 

New  York  and  New  Haven, 
shareholders'  rights  in,  47; 
"  Schuyler  frauds  "  in,  105-6. 

New  York  and  Oswego  Midland, 
cause  of  insolvency  of,  221. 

New  York  Central,  consolida- 
tion of,  270-2,  288,  336;  over- 
capitalization of,  289-90.  337; 
merger  of  lines  of,  in  western 
New  York,  291 ;  acquired  by 
C.  Vanderbilt,  297;  consolida- 
tion of,  with  Hudson  River, 
290 ;  share  dividend  of.  338. 

New  York  Central  and  Hudson 
River,  consolidation  of,  276. 
290;  terminal  of,  in  New 
York,  78-9,  288,  328,  332-3; 
car  trust  and,  84;  operating 
economies  of,  161 ;  early  ac- 
counting organization  of,  178 ; 
community  of  Interest  and, 
278-80,  282;  system  mileage 
of,  286-7;  family  control  of, 
293 ;  control  of  Boston  and 
Albany  by.  1.53.  279,  284-5, 
301,  318;  control  of  Lake 
Shore  by,  295,  319 ;  control  of 
Michigan  Central  by,  295; 
control  of  West  Shore  by,  277, 
289,  299-300;  in  joint  control 


451 


INDEX 


of  the  Rutland,  285;  rela- 
tion of,  with  the  New  Haven, 
153,  285;  shares  of,  held  by 
Union  Pacific,  237,  316 ;  use 
of  Lake  Shore  as  holding 
company  by,  315. 

New  York,  Chicago,  and  St. 
Louis,  cause  of  insolvency  of, 
221 ;  acquired  by  Lake  Shore, 
277,  289,  31G. 

New  York,  Lake  Erie,  and 
Western,  financing  of  exten- 
sions of,  73 ;  cause  of  insolv- 
ency of,  224;  reorganization 
of,  264-5. 

New  York,  New  Haven,  and 
Hartford,  consolidation  of, 
277 ;  short  term  notes  and, 
49 ;  physical  connection  of, 
with  the  Pennsylvania,  152 ; 
affiliation  of,  with  New  York 
Central  and  Boston  and  Al- 
bany, 153,  285 ;  community  of 
interest  and,  279-80 ;  control 
of  New  England  territory  by, 
284-5 ;  traction  and  steamship 
lines  of,  285 ;  acquisition  of 
New  York  and  New  England 
by,  289 ;  merger  of  subsidiary 
lines  of,  299 ;  as  a  holding 
company,  316-7. 

New  York,  Ontario,  and  West- 
ern, independent  auditors  of, 
103 ;  community  of  interest 
and,  279 ;  controlled  by  the 
New  Haven,  317. 

New  York,  Pennsylvania,  and 
Ohio,  taken  over  by  the  Erie, 
264-5. 

New  York,  West  Shore,  and 
Buffalo,  causes  of  insolvency 
of,  79,  219,  221 ;  receivership 


of,  244 ;  reorganization  of, 
253,   258,   261. 

Newport  and  Cincinnati  Bridge 
company,  77. 

Niagara  Falls  and  Lewistou, 
merged  in  New  York  Central, 
291. 

"  Nickel  Plate."  fiee  New  York, 
Chicago,  and  St.  Louis. 

Norfolk  and  Carolina,  consoli- 
dation of,  with  Atlantic  Coast 
Line,  311. 

Norfolk  and  Western,  car  trusts 
and,  84-5 ;  receivership  of, 
236,  242 ;  reorganization  of, 
258,  264,  2(59;  community  of 
interest  and.  278 ;  controlled 
by  the  Pennsylvania,  278, 
297. 

North  American  company,  310. 

North  Missouri  railroad,  con- 
struction   contract   of,   59. 

Northeastern  of  Georgia,  ac- 
quired by  Richmond  and  Dan- 
ville, 296. 

Northern  Central,  consolidation 
of,  274 ;  community  of  inter- 
est and,  278. 

Northern  Pacific,  sale  of  bonds 
of,  in  Europe,  23-4;  land 
grant  to,  33 ;  shareholders' 
rights  in,  47 ;  land  specula- 
tion of,  62;  Portland  terminal 
of,  80 ;  city  promotion  and, 
152 ;  causes  of  insolvency  of, 
62,  175,  219,  221.  223;  receiv- 
ership of,  239,  242,  244-5;  re- 
organization of,  255,  263-4, 
266-7,  269,  270;  Villard's  lease 
of  Wisconsin  Central  branch 
of,  221,  288;  in  joint  control 
of  the  Burlington,  287-8,  295; 


452 


INDEX 


acquired  by  Oregon  and 
Transcontinental  company, 
309-10. 

Nortliern  Securities  company, 
holding  company,  311-3. 

Northern  Terminal  company, 
financed  by  Northern  Pacific 
and   Southern  Pacific,  80. 

Notes,  short  term,  as  capital 
obligations,  38-9,  41-2,  47-9. 
See  also  Insolvency ;  Reor- 
ganization. 

Ohio,  subsidy  policy  in,  32 ;  ac- 
counting requirements  in, 
193n ;  regulation  of  issuance 
of  securities  in,  348. 

Ohio  and  Indiana,  construction 
of,  aided  by  the  Pennsylvania, 
73 ;  consolidation  of,  with 
Ohio  and  Pennsylvania  and 
Fort  Wayne  and  Chicago  as 
Pittsburgh,  Fort  Wayne,  and 
Chicago,  274. 

Ohio  and  Mississipi)i,  cause  of 
insolvency  of,  221 ;  receiver- 
ship of,  241. 

Ohio  and  Pennsylvania,  con- 
struction of,  aided  by  the 
Pennsylvania,  73 ;  consolida- 
tion of,  with  Ohio  and  Indi- 
ana and  Fort  Wayne  and  Chi- 
cago as  Pittsburgh,  Fort 
Wayne,    and   Chicago,    274. 

Old  Colony,  investment  basis  of, 
1  ;    consolidation    of,    285-G. 

Operating  account.  See  Ac- 
counts. 

Operating  ratio,  as  test  of  effi- 
ciency, 209. 

Operation,  concerned  with  net 
earnings,  149-50;  development 


of  trafiic  in,  150-2 ;  reduction 
of  expenses  in,  153 ;  tendency 
toward  increased  expenses  in, 
153-7 ;  opportunities  for  econ- 
omy in.  157-05 ;  receivers  as 
managers  of,  239-40, 

Oregon,  accounting  require- 
ments in,  193n-4n. 

Oregon  and  California,  leased 
by  the  Southern  Pacific  com- 
pany, 30G-7;  leased  by  the 
Oregon  and  Transcontinental 
company,  310. 

Oregon  and  Transcontinental 
company,  a  non-operating 
holding  company,  309-10. 

Oregon  Railroad  and  Naviga- 
tion company,  controlled  by 
Union  Pacific,  31G. 

Oregon  Railw.'iy  and  Naviga- 
tion company,  controlled  by 
Oregon  and  Transcontinental 
company,  309. 

Oregon  Short  Line,  controlled 
by  Union  Pacific,  294  ;  used  as 
holding  company,  31G. 

Organization,  financial,  corpo- 
rate, 95-100;  investors',  100-4. 

Overcapitalization,  in  general, 
822-5 ;  standards  of  appraise- 
ment :  outstanding  securities, 
325-6;  original  cost  less  de- 
preciation, 32<)-8 ;  cost  of  re- 
production, 328-32 ;  realization 
value,  332-3 ;  at  construction, 
334-5 ;  at  reorganization, 
270-1,  335-G ;  at  consolidation, 
289-90,  33G-7;  share  dividends 
and,  337-9;  results  of,  339- 
43;  public  attitude  toward, 
343-5 ;  state  regulation  of  se- 
curities and,   345-9;    national 


453 


INDEX 


regulation  of,  proposed,  349- 
51 ;  Railroad  Securities  Com- 
mission's recommendation  of 
publicity  as  a  remedy  for, 
351-2 ;  bibliography  on,  368-9. 
See  also  Capital. 
Overland  Contract  company, 
308. 


Pacific  Improvement  company, 
construction  of  railroads  in 
California  by,  71. 

Pacific  Mail  Steamship,  con- 
trolled by  Pacific  Improve- 
ment company,  71 ;  Hunting- 
ton's betterment  policy  in, 
147. 

Payrolls,  190-1.   -See  also  Labor. 

Pennsylvania  company,  relation 
of,  to  receivership  of  St. 
Louis,  Vandalia,  and  Terre 
Haute,  234 ;  community  of  in- 
terest and,  278,  280;  an  op- 
erating holding  company,  con- 
trolled by  the  Pennsylvania 
railroad,  305. 

Pennsylvania     Fiscal     Agency. 
See  Credit  Mobilier. 

Pennsylvania  railroad,  canvass 
for  subscriptions  to,  20 ;  un- 
derwriting in,  25,  27-8;  short 
term  notes  and,  48-9 ;  con- 
struction of,  begun  on  share 
basis,  51 ;  extensions  of,  73 ; 
New  York  terminal  of,  152-3 ; 
car  trusts  and,  85 ;  equipment 
bonds  of,  86;  betterment  pol- 
icy of,  146;  inadequacy  of 
early  reports  of,  213 ;  exten- 
sion of,  to  Chicago  and  St. 
Louis,  276;  community  of  in- 


terest and,  278-80,  282;  sys- 
tem mileage  of,  286-7;  lease 
of  United  Railroads  of  New 
Jersey  by,  2SS,  300-1;  lease 
of  Philadelphia  and  Erie, 
Harrisburg  and  Lancaster, 
and  Pittsburgh,  Fort  Wayne, 
and  Chicago  by,  300 ;  pur- 
chase of  Pittsburgh  and  Steu- 
benville  by,  291  ;  minority 
control  of  Norfolk  and  West- 
ern by,  297;  merger  of,  with 
Philadelphia  and  Erie,  299, 
301 ;  acquisition  of  Philadel- 
phia, Wilmington,  and  Balti- 
more by,  after  contest  with 
Baltimore  and  Ohio,  294;  con- 
trol of  the  Pennsylvania  com- 
pany by,  305 ;  control  of  the 
Southern  Railway  Security 
company  by,  308 ;  sale  of 
Richmond  and  Danville  by, 
308;  interest  of,  in  Rich- 
mond-Washington company, 
315-6. 

Pension  funds,  employees', 
136-7,  172. 

Pere  Marquette,  equipment 
company  bonds  of,  87. 

Philadelphia  and  Columbia,  in- 
vestment basis  of,   1-2. 

Philadelphia  and  Erie,  construe' 
tion  of,  aided  by  the  Pennsyl- 
vania, 73  ;  leased  by  the  Penn- 
sylvania, 300 ;  merged  in  the 
Pennsylvania,  290,  301. 

Philadelphia  and  Reading, 
financing  of  terminals  of,  79 ; 
equipment  contract  of,  88 ; 
misleading  accounts  of,  181-2  ; 
cause  of  insolvency  of,  224; 
receivership     of,     244 ;     reor- 


454 


INDEX 


ganizatious  of,  248,  253.  207-8  ; 
controlled  by  the  Reading 
company.  310. 

Philadelphia  and  Reading  Coal 
and  Iron  Company,  248-9,  310. 

I'hiladelphia  and  Trenton,  in- 
vestment basis  of,  1-2. 

Philadelphia,  Baltimore,  and 
Washington,  community  of 
interest  and,  278. 

Philadelphia,  Wilmington,  and 
Baltimore,  merger  of,  with 
Baltimore  and  Port  Deposit 
and  Wilmington  and  Susque- 
hanna, 274 ;  acquired  by  the 
Pennsylvania,  294. 

Pittsburgh  and  Connellsville, 
construction  of,  aided  by 
Baltimore  and  Ohio,  73. 

Pittsburgh  and  Lal^e  Erie,  con- 
trolled by  Lake  Shore,  31G. 

Pittsburgh  and  Steubenville, 
purchased  by  the  Pennsyl- 
vania, 291. 

Pittsburgh,  Cincinnati,  and  St. 
Louis,  lease  of  Columbus, 
Chicago,  and  Indiana  Central 
by,  276. 

Pittsburgh,  Cincinnati,  Chicago, 
and  St.  Louis,  controlled  by 
the  Pennsylvania  company, 
305. 

Pittsburgh,  Fort  Wayne,  and 
Chicago,  consolidation  of, 
274 ;  terminal  bonds  of,  79 ; 
reorganization  of,  268 ; 
leased  by  the  Pennsylvania, 
276,  300;  operated  by  the 
Pennsylvania    company,    305. 

Portage,  Winnebago,  and  Lake 
Superior.  See  Wisconsin 
Central. 


Pooling,  as  forerunner  of  con- 
solidation, 277. 

Poor,  H.  v.,  on  railroad  re- 
ports, 212;  on  effect  of  con- 
solidation upon  operation.  318. 

Pratt,  C.  M.,  railroad  and  Stan- 
dard  Oil   affiliations  of,   280. 

Private  car  lines,  88-9. 

Profit  and  loss  account.  See 
Accounts. 

Promotion,  inducements  to, 
14-5 ;   bibliography   on,  361. 

Prospectus,  as  instrument  of 
promotion,  19. 

Providence  and  Worcester,  con- 
structed on  share  basis,  52. 

Provident  funds,  employees', 
136-7. 

Proxies,  shareholders',  100, 
103-4,  268.  See  also  Voting 
trust. 

Purchasing  agent,  as  factor  in 
operating  efficiency,  159-60; 
procedure  for,  191. 

Railroad  Securities  Commis- 
sion, recommendation  of  pub- 
licity as  remedy  for  over- 
capitalization, 351-2. 

Railroad  securities  compans',  a 
non-operating  holding  com- 
pany, controlled  by  Union 
Pacific,   311. 

Railway  Debenture  Trust 
Company,  management  of 
British  investments  in  Ameri- 
can railroads,  101-2. 

Railway  Share  Trust,  manage- 
ment of  British  Investments 
in  American  railroads  by, 
101-2. 

Ramsny.  .7.,  .Tr.,  contef.t  of,  with 


455 


INDEX 


G.  J.  Gould  for  control  of 
Wabash,  297. 

Randolph  and  Bridgewater, 
merged  in  Fall  River  rail- 
road, 274. 

Reading  company,  terminal 
bonds,  79 ;  equipment  con- 
tract of,  with  Philadelphia 
and  Reading,  88 ;  control  of 
Central  of  New  Jersey  by, 
288,  295,  310;  controlled  by 
Baltimore  and  Ohio  and  Lake 
Shore,  297;  control  of  Phila- 
delphia and  Reading  by,  310; 
overcapitalization  of,  337. 

Receivership,  receiver's  function 
in,  227 ;  preliminary  steps  in, 
227-8;  obstacles  in,  228-32; 
conflict  of  interests  in,  232-4 ; 
application  to  court  in,  234-7 ; 
qualiflcatious  of  receivers 
for,  237-8;  jurisdiction  of, 
238-9 ;  administrative  aspects 
of,  239-43;  certificates  in, 
243-5;  termination  of,  245-7; 
bibliography  on,  304-6. 

Registrar,  position  of,  in  finan- 
cial organization,  98-100 ; 
"Schuyler  frauds."  in  con- 
nection  with,    105-6. 

Reorganization,  why  necessary, 
246-8;  early  attempts  at, 
225-6 ;  without  foreclosure, 
248-9 ;  purpose  of,  250-1  ; 
committees  on,  252-3 ;  serv- 
ices of  banking  houses  in, 
253 ;  deposit  of  securities  in, 
253 ;  dissentient  interests  in, 
253-4 ;  position  of  bondhold- 
ers in,  255;  sacrifices  of  share- 
holders in,  255-9;  assessment 
of  junior  bondholders  in,  259- 


63 ;  status  of  new  corporation 
after,  264-5 ;  provision  for 
future  needs  in,  265-6 ;  un- 
derwriting in,  266-7 ;  voting 
trust  and,  267-9;  results  of, 
269-70 ;  relation  of,  to  over- 
capitalization, 270-1,  335-6 ; 
bibliography  on,  366-7. 

Reports,  verification  of,  by  in- 
dependent accountants  and 
auditors,  103-4,  116-8,  140; 
inadequacy  of,  as  a  factor  in 
insolvency,  222 ;  Interstate 
Commerce  Commission  re- 
quirements in  regard  to, 
182-3,  210-2;  essential  speci- 
fications in,  213-4;  biblio- 
grai»hy  on.  ot;3-4. 

Requisitions,  supplies  and,  159- 
60,  191-2. 

Reserves.     Sec  Funds. 

Richmond  and  Danville,  con- 
trol of  Northeastern  of 
Georgia  by,  296 ;  controlled 
by  the  Pennsylvania,  308 ; 
control  of  Richmond  and 
West  Point  Terminal  Railway 
and  Warehouse  comi)auy  by, 
and  controlled  by  same,  308- 
9 ;  interest  of,  in  Alabama 
Great  Southern,  315. 

Richmond  and  West  Point 
Terminal  Railway  and  Ware- 
house company,  cause  of  in- 
solvency of,  218;  controlled 
by  Richmond  and  Danville 
and  control  of  same  by,  308-9 ; 
control  of  East  Tennessee, 
Virginia,  and  Georgia  and 
Central  Railroad  and  Bank- 
ing company  of  Georgia  by, 
309. 


456 


INDEX 


Richmond,  Fredericksburg,  and 
Potomac,  controlled  by  Rich- 
mond-Washington company, 
315-G. 

Richmond- Washington  company, 
a  holding  company,  315-6. 

liights,  shareholders',  25-6,  40, 
46-7 ;  relation  of,  to  over- 
capitalization, 338. 

Rio  Grande  Western,  finances 
Western  Pacific  railway,  75-6  ; 
merged  in  Denver  and  Rio 
Grande,   76,   294. 

Ripley,  E.  P.,  on  effect  of  con- 
solidation on  competition,  318. 

Ripley.  W.  Z.,  on  effect  of  con- 
solidation on  operating  or- 
ganization, 288-9  ;  on  effect  of 
overcapitalization  on  rates, 
339-40;  on  evils  of  overcapi- 
talization, 342-3. 

Rock  Island  company,  finan- 
cial afliliations  of,  280 ;  par- 
tial control  of  the  South- 
western territory  by,  283 ; 
creation  and  development  of 
the  system  of,  295-6;  inter- 
corporate relationships  of, 
313-4 ;  overcapitalization  of, 
333.  337. 

Rockefeller,  W.,  railroad  and 
Standard  Oil  affiliations  of, 
280. 

Rochester  and  Lake  Ontario, 
merged  in  New  York  Central, 
291. 

Rochester  and  Pittsburg  Coal 
and  Iron  company,  176. 

Rogers,  H.  H.,  financing  of  Vir- 
ginian railway,  30. 

Rutland  railroad,  default  of, 
on  lease  by  Central  Venuont, 


241 ;    controlled   by   the    New 
York    Central    and   the    New 
Haven,  285. 
Rutland   and   Whitehall,   bank- 
ing privilege  of,  17-8. 

Sacramento  and  Oakland,  ab- 
sorbed in  Western  Pacific 
railway,  76. 

Safety  appliances,  as  factor  in 
operating  economy,  155-6. 

St.  Joseph  and  Denver  City, 
land  speculation  of,  62. 

St.  Joseph  and  Iowa,  construc- 
tion of,  aided  by  Chicago, 
Rock  Island,  and  Pacific,  74. 

St.  Louis  and  San  Francisco, 
financing  of  bridge  construc- 
tion of,  78;  New  Orleans 
terminal  of,  80;  equipment 
bonds  of,  86-7;  reorganiza- 
tion of,  264;  control  of,  sur- 
rendered by  the  Atchison, 
264;  affiliated  with  "  Hawley 
system,"  283 ;  acquisition  of 
Chicago  and  Eastern  Illinois 
by,  296. 

St.  Louis  and  Southwestern, 
financing  of  bridge  construc- 
tion of,  78. 

St.  Louis  Belt  and  Terminal 
railway  company,  80. 

St.  Louis  Bridge  and  Tunnel 
company,  80. 

St.  Louis,  Iron  Mountain,  and 
Southern,  financing  of  bridge 
construction  of,  78 ;  car  trust 
and,  85;  owned  by  Missouri 
Pacific,  314. 

St.  Louis,  Vandalia,  and  Terre 
Haute,  solvent  receivership 
of,     234;     leased     by     Terre 


457 


INDEX 


Haute  and  Indianapolis,  276; 
controlled  by  the  Pennsyl- 
vania company,  305. 

St.  Paul  and  Pacific,  St.  Vin- 
cent extension,  operation  of, 
by  trustees,  230 ;  construction 
of,  by  receivers,  240,  244. 

St.  Paul,  Minneapolis,  and 
Manitoba,  acquired  by  Great 
Northern,  307-8. 

St.  Paul  Union  Depot  company, 
financed  by  six  railroads,  80. 

San  Francisco  and  San  Joaquin, 
acquired  by  the  Atchison, 
288. 

San  Francisco  Terminal  Rail- 
way and  Ferry  company,  ab- 
sorbed by  Western  Pacific 
railway,  76. 

San  Pedro,  Los  Angeles,  and 
Salt  Lake,  controlled  by 
Union   Pacific,   287,   289,    316. 

Sandusky,  Mansfield,  and  New- 
ark, leased  by  Baltimore  and 
Ohio,  276. 

Santa  Fe  Terminal  company, 
financed  by  the  Atchison,  79. 

Schiff,  J.,  railroad  affiliations 
of,  280. 

Schiff,  M.  L.,  part  in  Chicago 
and  Alton  "deal,"  144,  176, 
298,  337-8. 

Schuyler,  R.,  fraudulent  over- 
issue of  securities  by,  105-6. 

Scott,  T.  B.,  organization  of  the 
Southern  Railway  Security 
company  and,  308. 

Seaboard  Air  Line,  cause  of 
insolvency  of,  219,  343 ;  con- 
nection of,  with  foreclosure 
of  Cape  Fear  and  Yadkin, 
255;    interest    of,     in     Rich- 


mond-Washington     company, 
315-6. 

Seaboard  company,  overcapi- 
talization of,  337. 

Searles,  E.  F.,  control  of  the 
Hopkins  interest  in  the 
Southern  Pacific  by,  306. 

Shares,  underwriting,  21-8;  as 
capital  obligations,  38-41  ; 
market  in,  43-4 ;  privileged 
subscriptions  in,  46-7 ;  as  basis 
of  construction,  50-3,  76 ;  as 
bonus  to  bondholders,  54-5, 
75-6,  334-5;  issued  to  con- 
tractors, 58-63 ;  registration 
and  transfer  of,  98-106.  See 
also  Consolidation ;  Divi- 
dends ;  Overcapitalization ; 
Proxies ;  Voting  trust. 

Shares,  preferred,  nature  of 
preference,  40-1,  175;  issued 
in  reorganizations,  262. 

Sherman  Anti-trust  Act,  effect 
of,  on  consolidation,  277-9, 
290. 

Sielcken,  H.,  acquisition  of 
Kansas  City  Southern  by, 
298. 

Sinking  funds,  in  general,  43, 
135-6,  174,  197;  bridge  bonds 
and,  77-8 ;  equipment  bonds 
and,  86-7. 

Sioux  City  and  Pacific,  loan  of 
credit  to,  33. 

South  Dakota,  Railroad  Com- 
mission, railroad  appraisal 
and,  330 ;  capitalization  of 
franchise  values  disapproved 
by,  331n. 

Southwestern  of  Georgia,  con- 
struction contract  of,  58. 

Southern  railway,  New  Orleans 


458 


INDEX 


terminal  of,  80;  voting  trust 
of.  2GS ;  partial  control  of  the 
southern  territory  by,  282 ; 
foreclosure  purchased  of,  291, 
315 ;  control  of  Mobile  and 
Ohio  by,  282,  295 ;  acquisi- 
tion of  Alabama  Great  South- 
ern by,  315;  interest  of,  in 
Richmond-Washington  com- 
pany, 315-6 ;  overcapitaliza- 
tion of,  333,  336. 

Southeru  Illinois  and  Missouri 
Bridge  company,  financed  by 
five  railroads,  78. 

Southern  Pacific  company,  an 
operating  holding  company, 
305-7 ;  controlled  by  Union 
Pacific,  287-8,  295,  297, 
316;  overcapitalization  of, 
337. 

Southern  Pacific  railroad,  land 
grant  to,  33 ;  construction 
contracts  of,  71,  221 ;  Port- 
land terminal  of,  80 ;  better- 
ment policy  of,  144 ;  control 
of  Morgan  steamship  line  by, 
287 ;  tendency  toward  abso- 
lute ownership  of  subsidiary 
lines  in,  299. 

Southern  Pacific  railroad  com- 
pany, a  non-operating  holding 
company,  controlled  by  the 
Southern  Pacific  company, 
307. 

Southern  Railway  Security 
company,  a  non-operating 
holding  company,  controlled 
by  the  Pennsylvania,  308. 

Southwestern  Construction  com- 
pany, a  holding  company,  con- 
trolled by  Alabama  Great 
Southern,  315. 


Speyer  and  company,  railroad 
affiliations  of,  280. 

Standard  Oil  interest,  railroad 
affiliations  and,  280. 

Stanford,  L.,  connection  of, 
with  construction  of  Pacific 
railroads,  70-1 ;  organization 
of  the  Southern  Pacific  com- 
pany and,  305-7. 

Statistics,  compilation  of,  204-5; 
units,  205-8;  freight  and  pas- 
senger, 209-10;  reports  on, 
210-4 ;  bibliography  on,  363. 

Sterne,  S.,  on  Independent  ac- 
countants as  protection  to 
shareholders,   104n. 

Steubenville  and  Indiana,  con- 
struction of,  aided  by  the 
Pennsylvania,  73. 

Stillman,  J.,  railroad  and 
Standard  Oil  affiliations  of, 
280;  part  of,  in  Chicago  and 
Alton  "deal,"  144,  176,  298, 
337-8. 

Stockton  and  Beckwourth  Pass, 
absorbed  by  Western  Pacific 
railway,  76. 

Storekeeper,  procedure  for,  160, 
191-2. 

Subsidies,  as  aids  to  financing, 
43-4,  53-4,  58  ;  individual,  31 ; 
local,  18-9,  31-2;  national, 
32-3 ;  state,  31-2. 

Supplies,  as  factor  in  operating 
economy,  100 ;  requisitions 
and,  191-2. 

Surplus,  as  capital  obligation, 
38,  43  ;  as  source  of  dividends, 
39-40,  199;  appropriations  for 
betterments  and,  42-3,  146-7; 
as  balance  sheet  item,  124, 
128,  197-201 ;  management  of. 


459 


INDEX 


166-75;  distribution  of,  175-6. 

Surveys,  in  general,  15-6 ;  re- 
ports on,  as  prospectus  ma- 
terial, 19 ;  financed  at  state 
expense,  32. 

Susquehanna  railroad,  con- 
solidation of,  witli  York  and 
Cumberland  and  York  and 
Maryland  as  Northern  Cen- 
tral, 274. 

Swain,  H.  H.,  on  excessive  con- 
construction  as  cause  of  insol- 
vency, 220. 

Syndicates,  underwriting,  21-9, 
266-7. 

Syracuse  and  Utica,  constructed 
on  share  basis,  51. 

Taft,  W.  H.,  proposal  by,  of  na- 
tional regulation  of  issuance 
of  securities,  349-50. 

Tax  exemption,  as  aid  to  rail- 
road, 18. 

Taylor,  F.  W.,  on  "  scientific " 
management,  161-2. 

Terminal  Railroad  Association 
of  St.  Louis,  financed  by 
fourteen   railroads,  SO. 

Terminals,  financing,  78-80, 
152-3 ;  acquired  through  con- 
solidation, 288. 

Terre  Haute  and  Indianapolis, 
^relation  of,  to  receivership  of 
St.  Louis,  Vandalia,  and 
Terre  Haute,  234;  lease  of 
St.  Louis,  Vandalia,  and 
Terre  Haute  by,  276. 

Texas,  land  grants  in,  32; 
regulation  of  issuance  of  se- 
curities in,  347-8. 

Texas,  railroad  commission  of, 
railroad  appraisal  by,  329. 


Texas  and  Pacific,  construction 
contract  of,  63-4 ;  cause  of 
insolvency  of,  221 ;  reorgan- 
ization of,  249,  252,  258; 
shares  of,  held  by  Missouri 
Pacific,  316. 

Tickets,  basis  of  credit  of 
passenger  receipts,   188-90. 

Tidewater-Deepwater  railway. 
See  Virginian  railway. 

Toledo,  Ann  Arbor,  and  North 
Michigan,  receivership  of, 
239. 

Toledo,  St.  Louis,  and  Western, 
part  of  "  Hawley  system  "  in, 
283. 

Toledo,  Wabash,  and  Western, 
issue  of  land  bonds  by,  56. 

Traffic  associations,  forerunners 
of  consolidation,  277-8. 

Trans-Missouri  Freight  Associa- 
tion case,  effect  of,  on  consoli- 
dation, 277-9. 

Transfer  agent,  position  of,  in 
financial  organization,  98-9 ; 
"  Schuyler  frauds "  in  con- 
nection with,  105-6. 

Treasurer,  position  of,  in  finan- 
cial organization,  97-8 ;  pay- 
ment of  dividends  and  inter- 
est by,  99 ;  as  chief  account- 
ing officer,  178-9 ;  procedure 
for,  187,  189,  191. 

Trust,  railroad,  proposed,  303-5. 

Trust  company,  as  trustee  of 
car  trust,  83 ;  as  registrar, 
99,  105;  as  trustee  of  voting 
trust,  268. 

Underwriting,  issuance  of  new 
securities  and,  21-9 ;  reorgan- 
ization plans  and,  266-7;  bib- 


460 


INDEX 


liography  on,  359.  See  also 
Bonds ;  Shares. 
Union  Pacific,  underwriting  in, 
25 ;  opposition  of,  to  Denver, 
Northwestern,  and  Pacific 
project,  29-30 ;  land  grant 
to,  33;  loan  of  credit  to,  33; 
shareholders  in,  rights  of, 
47 ;  construction  contracts  of, 
64-70 ;  extensions  of,  74 ; 
equipment  of,  89 ;  better- 
ments of,  139-40;  cause  of 
insolvency  of,  175 ;  reorgan- 
ization of,  254  ;  community  of 
Interest  and,  279,  282-3;  sys- 
tem mileage  of.  287 ;  invest- 
ments of,  in  railroad  shares, 

287,  292-3;  subordinate  lines 
of,  287-9 ;  merger  of,  with 
Kansas  Pacific  and  Denver 
Pacific,  294;  control  of  Illi- 
nois Central  by,  282,  287,  311 ; 
control  of  Oregon  Short 
Line  by,  294;  control  of 
Southern  Pacific  by,  287-8, 
295,  297;  relations  of,  with 
Northern  Securities  company, 
312-3;  use  of  Oregon  Short 
Line  as  holding  company  by, 
315. 

United  Railroads  of  New  Jer- 
sey, consolidation  of,  289 ; 
leased   by    the   Pennsylvania, 

288,  300-1.  See  also  Camden 
and  Amboy. 

United  States  Rolling  Stock 
company,  equipment  con- 
tracts of,  88. 


Vanderbilt,    C,    acquisition    of 
New    York   Central    by,   298: 


extension  of  system  to  Chi- 
cago by,  276 ;  attempt  to  ac- 
quire the  Erie  by,  289 ;  ac- 
quisition of  West  Shore  and  of 
"Nickel  Plate"  by,  289;  on 
ethics  of  corporate  manage- 
ment, 320. 

Vanderbilt,  F.  W.,  balance  of 
power  in  Chicago,  Minne- 
apolis, St.  Paul,  and  Omaha 
and,  297. 

Vanderbilt,  W.  H.,  acquisition 
of  Michigan  Central  by,  298. 

Vanderbilt,  W.  K.,  banking  af- 
filiations of.  280. 

Vermont,  accounting  require- 
ments in,  193n-4n ;  regula- 
tion of  issuance  of  securities 
in,  348. 

Vermont  and  Canada,  leased  by 
Vermont  Central,  218;  re- 
ceivership of,  245. 

Vermont  Central,  fraudulent 
overissue  of  securities  by, 
105 ;  lease  of  Vermont  and 
Canada  by,  218 ;  operation  of, 
by  trustees,  229. 

Vermont  Valley,  connection  of, 
with  "  Schuyler  frauds,"  105. 

Vicksburg  and  Meridian,  con- 
trol of,  acquired  by  AlabaiiJft 
Great  Southern,  315. 

Vicksburg,  Shreveport,  and  Pa- 
cific, acquired  by  Alabama 
Great  Southern,  315. 

Villard,  H.,  lease  of  Wisconsin 
Central  by,  288 ;  organiza- 
tion of  Oregon  and  Transcon- 
tinental  company   by,   309-10. 

Virginia,  subsidy  policy  in,  32. 

Virginia  company,  Norfolk  and 
Western  car  trusts  and,   85. 


461 


INDEX 


Virginian  railway,  financing  of      Western     railroad,     investment 


construction  of,  30. 
Voting   trust,    as   protection   to 
shareholders,    102-3 ;    as   pro- 
tection to  bondholders,  267-9, 

Wabash,  terminal  bonds  of, 
79;  entrance  of,  into  Pitts- 
burgh, 152,  283;  Gould-Ram- 
sey contest  for  control  of, 
297;  shares  of,  held  by  Mis- 
souri Pacific,  316. 

Wabash,  St.  Louis,  and  Pacific, 
cause  of  insolvency  of,  218 ; 
"  friendly "  receivership  of, 
235,  237,  241,  245. 

Walters,  H.,  partial  control  of 
the  Southern  territory  by, 
282. 

Washington,  accounting  re- 
quirements in,  193n ;  regula- 
tion of  issuance  of  securities 
in,  348. 

Washington  and  Saratoga,  con- 
nection of,  with  "  Schuyler 
frauds,"  105. 

Washington  Southern,  owned 
by  Richmond-Washington 

company,  315-G. 

Waybills,  local,  through,  and 
interline,  basis  of  audit  of 
freight  receipts  on,  182,  185-8 ; 
basis  of  trafiic  statistics, 
209-10. 

Wellington,  A.  M.,  on  induce- 
ment to  promotion,  14-5. 

West  Shore,  reorganization  of, 
265 ;  controlled  by  New  York 
Central,  277,  289.  299-300. 

Western  Development  company, 
construction  of  railroads  in 
California  by,  71. 


basis  of,  1 ;  use  of  pulpit  by, 
as  agency  of  appeal  for  sup- 
port, 20 ;  canvass  for  sub- 
scriptions by,  20;  sub- 
sidized by  Massachusetts, 
31-2 ;  consolidated  with  Bos- 
ton and  Worcester  as  Boston 
and  Albany,  273,  290. 

Western  Maryland,  primitive 
accounting  procedure  of, 
180-1 ;  acquired  by  Gould  in- 
terest,  283,  288,  296. 

Western  Pacific  railroad,  loan 
of  credit  to,  33 ;  construction 
of,  70-1. 

Western  Pacific  railway,  fi- 
nanced by  Denver  and  Rio 
Grande  and  Rio  Grande 
Western,  75-6 ;  effect  of  con- 
struction of,  on  Gould-Harri- 
man  community  of  interest, 
279,  283. 

Western  Union  railroad,  merged 
in  Chicago,  Milwaukee,  and 
St.   Paul,  301. 

Wilmar  and  Sioux  Falls,  ac- 
quired by  Great  Northern, 
307-8. 

Wilmington  and  Weldon,  con- 
solidation of,  with  Atlantic 
Coast  Line,  311. 

Wilmington  and  Susquehanna, 
merged  in  Philadelphia,  Wil- 
mington, and  Baltimore,  274, 

Wisconsin,  accounting  require- 
ments in,  192n-3n ;  railroad 
appraisal  in,  329-30;  regula- 
tion of  issuance  of  securities 
in,  348. 

Wisconsin  Central,  construc- 
tion contract   of,   64;   equip- 


462 


INDEX 


ment  contract  of,  88 ;  leased 
by  Northern  Pacific,  221,  288; 
cause  of  insolvency  of,  223, 
328 ;  reorganization  of,  249 ; 
controlled  by  tbe  Wisconsin 
Central  company,  307;  re- 
ceivership of,  307. 

Wisconsin  Central  company,  an 
operating  holding  company, 
307. 

Wisconsin,  Minnesota,  and  Pa- 
cific, construction  of,  aided 
by  Chicago,  Rock  Island,  and 
Pacific,  74. 
•  isconsin  Railroad  Commis- 
sion, cost  accounting  methods 
applied  to  railroads  and,  208 ; 
valuation  of  railroad  prop- 
erty by,  328. 


Woodlock,  T.  F.,  on  units  of 
transportation  cost,  208;  on 
reorganization  and  over- 
capitalization, 270-1 ;  on  effect 
of  overcapitalization  on  rates, 
339. 

Yoakum,  B.  F.,  affiliation  of, 
with  "  Hawley  system,"   283. 

York  and  Cumberland,  con- 
solidation of,  with  York  and 
Maryland  and  Maryland  and 
Susquehanna  as  Northern 
Central,  274. 

York  and  Maryland,  consolida- 
tion of,  with  York  and  Cum- 
berland and  Maryland  and 
Susquehanna  as  Northern 
Central,  274. 


(7) 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 
Th.s  book  is  DUE  on  the  last  date  stan,ped  below. 


FEB    11968 


ID-URC 

IB  URL      0CT29198B 

NOV  011988 


BEC'D  LD-URC 
MARl    iMt 

ffB291968 


iS,   SEP 


-tW 


'^     ^'T't) 


fSP  '''o(^W 


Form  L9-Series  444 


3  1158  01296  3962 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


AA    001  027  159 


